THE FED JUST CRASHED THE MARKET | Major Changes Explained

What's up guys, it's Graham here. So, it's confirmed, as of a few hours ago, the Federal Reserve just raised their benchmark interest rates by another 75 basis points. This means we are now sitting at the highest interest rates that we've seen since 2007, right before the great financial crisis. And we're already beginning to feel the effects. After all, it's said that the FED is unaliving the housing market, with home sales having fallen 30 percent. They're destabilizing global currencies by increasing the value of each US dollar. If this continues, experts warn that they'll drive us straight into a global recession, in which this would just be the very beginning.

That's why it's incredibly important to cover exactly what they say is going to happen throughout these next few months, the biggest changes being made, what this means for you, and then most importantly, how you could use this information to make you money. On this episode of Millennials, keep going into debt. Although before we start, since we're talking about inflation, if you appreciate the same day last minute reporting, it would mean a lot to me if you inflated the like button and subscribed if you haven't done that already. It seriously helps me out tremendously. And as a thank you for doing that, here's a picture of Elon Musk carrying a sink into Twitter. Let that sink in. So thank you guys so much, and also a big thank you to Policygenius for sponsoring this video, but more on that later.

All right, so it's a really quick background for those unaware. The Federal Reserve raises these interest rates to help combat inflation, with the philosophy that the higher interest rates go, the more expensive it is to borrow, the less people spend, and in an ideal world, the slower prices increase. The problem, however, is when inflation begins to eat away at the purchasing power of your money faster than you're able to make it. As I'm sure you've seen, it's out of control, and wages simply cannot rise fast enough. In fact, it was recently reported that employers continued hiking wages to attract workers and hold on to existing staff during the third quarter, but the raises did not keep up with inflation, which is bad news for the Federal Reserve since higher wages contribute to higher prices. That is something the central bank is trying to bring back down.

That's why the higher inflation goes and the longer it persists, the more rate hikes we're likely to see. Over the next few months, their goal is to create a deflationary environment where prices come back down, employment shortages are balanced, and the economy returns to their ideal target. But there's a bit of a problem. Initially, their federal funds rate was thought to be a target of 1.9 percent by the end of the year, but in April that was moved to 2.75 percent. In June, that was moved to three and a half percent, in August it was moved to four percent, and now it's currently five percent, with fears that it's going to go even higher now that inflation is not going away.

So in terms of what's happening right now, what the Federal Reserve just said as of a few hours ago, and how this is going to impact your investments—from stocks to savings to real estate—here's what you need to know. All right, well before we talk about what Jerome Powell just said a few hours ago and his prediction for the future, we should talk about one aspect of the economy that's being hit especially hard, and that would be real estate. Since January, mortgage rates have almost tripled from 2.8 to now over seven percent. As of today, we're sitting at the highest rates that we've seen since 2002.

As a result, home sales are tumbling. Recent reports have found that new construction sales have declined 10 percent in the last month; they're down 30 percent year over year, and that marks the lowest we've been since the mortgage crisis in 2010. In fact, the senior economist at Realtor.com explains that with wages falling behind on account of inflation and rates rising, buyers' purchasing power has been reduced by over a hundred thousand dollars, leaving the market with nowhere else to go but down.

As an example, look no further than mortgage demand. This is typically regarded as a forward-looking indicator of the market since a buyer has to qualify for a mortgage before purchasing a house. Recently, mortgage demand is at its lowest level in 25 years. On top of that, we also have what's called the housing sentiment index. This is a survey that analyzes consumer sentiment towards owning and renting a home, the current state of household finances, and the overall confidence in the economy. October of 2022 was fairly telling in terms of which direction the market thinks we're headed in. The most recent report found that only 19 percent of home buyers believe that now is a good time to buy, while 59 percent believe it's a good time to sell. This represents the lowest confidence in the market since 2011.

In a way, this is exactly what the Federal Reserve wants because it's reported that for three decades prior to the pandemic, a one dollar decline in home equity appears to have caused a roughly 1.3 percent decline in household consumption. So by lowering values, consumption should decline—or at least that's the hope. Because second, we have to talk about the stock market. In September, Bloomberg reported that U.S. net worth fell 7.7 trillion dollars in wake of declining stock values, while all three indexes are still down around 20 to 25 percent from their peak. Even though stocks are up from the optimism that weaker economic data could cause the Federal Reserve to pivot, along with the Bank of Canada's recent decision to slow rate hikes during recession fears, others believe that this is just a bear market rally, while stocks temporarily recover before crashing even further.

In fact, Investopedia notes that every bear market between 1901 and 2015 spawned at least one five percent rally, and rallies of 10 percent or more interrupted two-thirds of the 21 bear markets over that span. Although in terms of what the Federal Reserve just said as of a few hours ago and their warning for the entire economy, here's what you need to know because they gave us an inside look into exactly what we could expect over these next few months. Although before we go into that, here's the thing: just like the Federal Reserve is trying to protect the economy from inflation, it's equally as important that you protect yourself and your loved ones with life insurance for whatever might come your way.

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And now, with that said, let's get back to the video. All right, now, in terms of what the Federal Reserve just said, it's a doozy to start. As I mentioned earlier, they began by raising interest rates by 75 basis points, which was what the market expected, but their fine print caught everybody off guard. Even though their intentions were to raise rates so that it's sufficiently restrictive to return inflation to two percent over time, they followed that up by saying that they'll take into account the lags in which monetary policy affects economic activity and inflation and economic and financial developments. This is massive.

After all, it's not like the rate hikes have an immediate effect on the economy the next day. I mean, sure, stock prices tend to fluctuate within the minutes, but for the rest of the economy, it's a patient waiting game. Companies, for example, won't know their sales numbers until the end of the month or the quarter; housing data won't show up for another 60 days; consumer spending is highly volatile and based on a number of factors. By the time we see the result of every policy decision, months have already gone by. In a way, it's kind of like steering a large ship where you could turn the wheel as much as you want, but you're not going to move in that direction until enough distance is passed.

And that's exactly what's happening here. By acknowledging these lags, it gives the Federal Reserve enough time to pause, slow down the rate hikes, adjust as needed, and basically take a wait-and-see approach without having to drive the economy into a disaster. However, the bad news is that there is the concern that inflation will become entrenched within the economy, meaning consumers believe that inflation will continue to rise, and that will reach markets that are unlikely to come back down in price, like rent and medical services. If this happens, it's possible that we'll need even more rate hikes and even more pain in the economy.

So to prevent this from happening, the FED mentioned that they may have to take more extreme measures ahead of time, and that is why the markets immediately began to fall. Now, even though this might be really bad news for some people, it could also be really good news for others. So most importantly, we have to talk about how you could use this information to make you money.

All right, now in terms of who could benefit from these rate hikes, first we have to talk about savers. That's because as the federal funds rate increases, banks begin to earn more on their deposits, and as a result, they can afford to pay you back more of their profit. For instance, Ally Bank is currently paying 2.35 percent interest; Marcus by Goldman Sachs is paying two and a half percent; Capital One and CIT Bank are both paying three percent; and Upgrade through Cross Riverbank is able to pay three and a half percent on balances over a thousand dollars. That's just insane.

Just for context, these are rates that we haven't seen since the early and mid-2000s, so this is a big deal that savers are finally able to earn a respectable amount of money in a savings account. In fact, if you want to take this a step further, government treasuries are currently paying about four to four and a half percent on all terms above three months, and other bonds are paying above six percent. This means if you don't mind locking your money away temporarily, you could almost get the exact same return as the S&P 500 with no risk whatsoever. This gives people a massive incentive to save more money, take on less risk, and it's extremely popular, with even the Treasury Direct website having crashed from the influx of buyers locking in 9.62 inflation bonds.

But this doesn't stop quite there. The second—I've mentioned this before, but it's worth saying again—the higher interest rates go, the better it is for anybody with a fixed-rate loan. That's because as long as you've locked in your interest rate, your payment is going to stay the exact same, and you're not going to be impacted whatsoever by the Federal Reserve's decisions. In addition to that, if inflation stays high, the net impact of your debt goes down, making it easier to pay off with future dollars.

With inflation still near record highs, as backwards as this sounds, the longer you don't pay off your debt, the easier it is to pay off your debt. I know that sounds kind of weird to say, but trust me, the math works. And finally, third, we have to address the elusive Federal Reserve pivot. This is a signal where the Federal Reserve begins their transition to back down from rate hikes, readjust their policies, and move toward a stance that would cause the market to go back up.

In terms of when this could happen, the answer is: it depends. Some analysts believe that this will occur once inflation begins to subside, which could be as soon as early 2023, while others argue that it'll probably be a lot later, like the end of 2023, since inflation is not going away as fast as they would like. However, I think it's worth it to remember that a Federal Reserve pivot doesn't have to be this momentous change of pace. In fact, if anything, it's likely to be a 50 basis point rate hike instead of a 75, or maybe a quick pause so that they could wait and see what happens.

Not to mention, there have been other charts showing that once the FED pivots, stocks crash even more while they over-correct the situation. So the truth is anything can happen. Seeking Alpha recently ran a really great article published by Lance Roberts, who argues that every time the FED scales back on their balance sheet or pivots—in this case—the market trades flat or falls. After all, since they operate on lagging data, they often begin to change their pace once unemployment has already increased and once a recession is already realized.

So a FED pivot could be an early sign that things are about to change, but it'll be impossible to tell exactly when the next bull market will occur. That's why it's important to reaffirm that no one can time the market, and generally the best strategy is to stay employed, save money, and dollar-cost average to the markets. Sure, prices might continue to decline in the short term, but if anything, that just gives you a better buying opportunity as prices drop.

Now, for myself, I'm currently keeping about 20 percent of my net worth in cash, spread between treasuries and high-yield savings accounts. I'm buying into U.S. and international stocks on a regular basis, and I'm keeping a lookout for a good real estate deal whenever that might come up. If you'd like to be kept up to date, by the way, just make sure to subscribe because hopefully, in the next few months, something cool will come up.

So with that said, you guys, thank you so much for watching. As always, feel free to add me on Instagram. Thank you so much for watching, and until next time.