THE FED JUST BAILED | Major Changes Explained

What's up, Graham? It's guys here. So I'm not psychic, but what if I told you exactly what's gonna happen throughout the markets in 2022? As in, I just give you the exact blueprint to every single adjustment being made that directly influences how people save, spend, and invest their money. Are you interested?

Well, if the answer is yes, you need to hear this, because just the other day we were given the Federal Reserve's complete outline for raising interest rates and cutting stimulus throughout the next year. This is the most crucial piece of data that people need to be made aware of. These rates have the potential to increase how much you get paid from a savings account, how much a home mortgage costs you every month, and whether or not the stock market panics from a sell-off when the time comes to dial back that money-printing machine. That's why it's incredibly important to cover exactly what they say is going to happen over the next year: the biggest change being made, how this is going to impact both the stock and real estate market, and then, most importantly, how you could use this information to make you money.

But before we go into that, we have a bit of a problem. Recently, it's come to my attention that 43% of you watching are not subscribed. So how about this: if you subscribe and let me know down below in the comment section, I will personally respond back to you. And to up the ante, for every like this video receives in the first week, I will donate 10 cents to Team Seas to help clean up the oceans. So thanks so much for helping out and joining the community, and with that said, let's begin.

All right, so here's what's going on. The Federal Reserve is what's known as the central bank, whose role is to oversee our economy, regulate financial institutions, and control the amount of money that goes into and out of the system. Because of that, they're probably the most single influential entity throughout the markets, and their policy changes have the power to move the markets in either direction with a single remark.

So in terms of what's happening now, we first have to understand exactly what they did back in March of 2020. Back then, there was a serious concern that our entire economy could collapse from being shut down. Lending would freeze, businesses would fail, and people would be left to fend for themselves while the markets turned red. So the Fed took action ahead of time by lowering their benchmark interest rates all the way down to zero percent as a way to incentivize people and banks to borrow and spend more money.

On top of that, they began injecting 120 billion dollars a month into our economy by buying 80 billion dollars a month of treasuries and 40 billion dollars a month in mortgage-backed securities. The goal was that by guaranteeing these debts, banks would feel more comfortable lending, and eventually that money would flow back to the people who need it the most.

Throughout the last three months, prices of consumer goods have risen at their fastest pace in 40 years, meaning everything is getting more and more expensive, each and every day's wages purely budge. Now the Federal Reserve needs to slow things down before things get even more out of control. They have made it very clear that since the beginning of the year, their intention is to slowly raise interest rates and scale back the 120 billion dollars a month of stimulus, but they've been patiently waiting for just the right moment to plan their next move, and that was just revealed for all of us to hear.

First, they plan to reduce their 120 billion dollars a month stimulus down by 30 billion dollars a month, otherwise known as the Fed taper. So imagine our markets like a campfire. If you keep it controlled under the right conditions, it'll keep you warm, cook your food, and protect you from Bigfoot. However, if you let the fire grow out of control, it could burn everything down and give you a very bad time.

So in a way, this is exactly what's happening with interest rates and inflation. A little inflation helps our economy grow at a consistent rate, incentivizes people to spend their money, and in moderate conditions, it's perfectly fine. But once it starts getting out of control, the Fed has to throw a little water on the fire to keep it from burning everything down. And that's kind of what's happening today.

Under this new plan, the Federal Reserve plans to reduce their stimulus by 30 billion dollars a month until by the end of March, they're completely done and they don't need to buy anything else. The plan is that by reducing their purchases a little bit every month, the market could slowly begin to adjust and function on their own. Even though there might be some adjustments, the goal is that we should barely even notice it.

Secondly, we have upcoming interest rate hikes. Like I mentioned, throughout the last 18 months, interest rates have pretty much been zero, mortgages dropped to their lowest level in history, and growth stocks climbed from the excess capital well pretty much everywhere. With all of this excitement comes surging demand, which of course pushes prices up, especially when inventory is low. But as we all know, these conditions just can't last indefinitely.

There's only so low that rates could go before inflation increases, borrowing has been maximized, and it becomes counterproductive. So they say a rate hike is in order sooner than expected. A new projection shows that every single Fed official expects at least one rate hike in 2022, which is a drastic change from just a few months ago when only half of them believed an interest rate increase wasn't needed until at least 2023.

Their expectation is that interest rates are going to be 0.9 percent at the end of 2022, 1.6 percent at the end of 2023, and 2.1 percent at the end of 2024. So that means most likely the first rate increase we could see is in April of 2022. From there, it appears that the majority of the Fed expects we'll see three rate hikes throughout the rest of the year and another three rate hikes throughout 2023, meaning it'll be a completely gradual consistent shift along the way.

They've also made it very clear that they're ready to pivot if they need to, so they're likely going to increase rates and then take a wait-and-see approach just to make sure the economy can handle it.

Third, we have inflation to start. I'm sure we're all aware inflation is everywhere. Even though the Federal Reserve believes it to be transitory, meaning things will increase and then come back down, it is lasting longer than expected for two main reasons. One is supply chain bottlenecks and shipping. See, most businesses rely on imports from other countries, and often those items are shipped overseas in large containers that arrive to ports where they get stored and sent on trucks to their final destination.

But those shipping container costs are expected to rise by an average of 126 percent this year and even more as spot rates and current shipments are four and a half times higher than they were a year ago. But it doesn't even end there; reports also show that reliability is half as good, and delays are more than twice as long as they were in 2019. Meaning not only are costs higher, but it takes longer to arrive.

That means with more demand and less supply, prices increase, and that gets reflected in the inflation that we see today. Two, there's also an ongoing labor shortage. It's reported that even though unemployment's been going down, the United States is still 4 million workers short compared with pre-pandemic levels. That means with fewer workers, companies have to pay more to attract new talent, and in turn, that increased cost gets passed on to you as a customer in the form of higher prices.

In fact, 63 percent of small businesses have already bumped prices on their products and services within the last year to compete. On top of that, a labor shortage also means that there are fewer people capable of handling a high amount of inventory through shipping ports. And with increased demand of physical goods, it's created a traffic jam of cargo vessels, sometimes waiting weeks to see the dock, further delaying their arrival and costing significantly more money to operate.

It's also causing manufacturers to slow down their production because what's the point of producing more and getting ahead if it's just going to be stuck at sea for weeks anyway? So all of that is to say that the Federal Reserve expects inflation to begin to settle down throughout next year and end off 2022 with a 2.6 inflation rate, down from the 6.8 percent where it is today. After that, they hope to see a 2.3 inflation in 2023 and finally 2.1 inflation in 2024. Now, whether or not that actually happens is anybody's guess, but so far they have underestimated what we've actually seen, so just keep that in mind.

So in terms of what this means for you, let's start with the stock market. It's no surprise that generally speaking, higher interest rates correlate with lower stock prices, because as money gets more expensive, that cost gets passed on to businesses who then report lower profits. In addition to that, lending gets a little bit more expensive, meaning companies borrow less, and as a result, they grow slower.

So on a very broad scale, higher interest rates are usually bad for the stock market. Most of us might remember what happened in late 2018 when the Fed began raising interest rates during some of its strongest growth and lowest unemployment ever. But that freaked out the market and caused it to fall almost 20 percent from its peak, with one of the worst December's since 1931.

In fact, recent data found that the S&P 500 has only had two losing years since 1990 when the Fed was raising interest rates: a nine percent decline in 2000 and a four percent drop in 2018. However, in the big picture, even though it seems automatically assumed that higher interest rates would be a hundred percent bad, it's not so clear. Since the 1960s, even throughout interest rate increases and decreases, the stock market has continued to trend upwards.

If we then take a closer look since 2017, we could see that throughout several rate hikes, the market defied the odds and kept going up. This relationship is even more apparent when you look at real rates, which is interest rates minus inflation. In this case, BlackRock explains that higher real rates could actually be positive for stock prices, causing them to go up.

On top of that, the SimplyWise blog found that since 1954, even though the S&P 500 monthly returns are three times lower during a rising interest rate environment, the most likely outcome during an interest rate increase is an S&P 500 that moves plus or minus five percent that following month. That's it. The Financial Samurai also found that the S&P 500 has on average gained 20 percent in a rising interest rate period since 1971, which can often span over several years.

So overall, their conclusion is that yes, rising rates can lead to a rotation away from growth and tech, but other industries like banking, industrials, and semiconductors tend to outperform, as rising rates go together with an improving economy. But remember, other economic conditions like demand, unemployment, and inflation could also impact stock prices, meaning over time stocks and interest rates can go up together, if even in the short term they go down.

The second we got the bigger one, and that would be real estate. But this is the type of purchase that's directly influenced by the interest rate that you pay on a mortgage. For example, if your budget is two thousand dollars a month, you can afford a 475,000 loan at a three percent interest rate. However, if interest rates increase to five and a half percent, that very same two thousand dollars a month only gets you a 355,000 loan, which is 120,000 less.

Not to mention, as a buyer, it's reported that a one percent increase in rates reduces your purchasing power by 11 percent. In this regard, higher interest rates directly impact home affordability because buyers qualify for less, and in return, sellers get less for their home. Simple, right? Well, the truth is, just like the stock market, there's not a simple answer in terms of what's going to happen.

If we look back historically, we could see that right after World War II, home prices continued increasing right alongside interest rates. After that, interest rates dropped and home prices continued to climb. It was also found that overall, a change in interest rates is not substantially impacting real estate values long term, meaning that most likely there are other factors that influence pricing.

For example, in 2018, when interest rates were increased and the stock market almost immediately dropped 20 percent, home prices fell some for the first time since the Great Financial Crisis. Why? Rising interest rates were not the entire picture; buyers also factored in a stock market decline leading them to believe that things could get worse and it might be better to wait.

All of that is to say that even though higher interest rates directly impact home affordability, other factors like local market conditions, demand, inventory, inflation, tax deductions, and the overall health of our economy are just as important. So rising rates on their own are not enough to cause housing prices to decline.

However, one more point to consider is that even if interest rates go up and housing prices go down, your payment could still be the exact same. That's because if that previously 475,000 home was two thousand dollars a month at a three percent interest rate, even if the home price drops to 355,000 with interest rates at five and a half percent, it still costs you that very same two thousand dollars a month.

So in the big picture, yes, we could see a decline in real estate values as interest rates increase, but so many other conditions have just as big of an impact. So that's why limited inventory and rising construction costs could very well keep prices elevated for quite some time, even if and when interest rates increase.

So overall, in terms of what this means for you, just understand that the market hates uncertainty. When people don't know what's going to happen, they tend to price in the worst possible-case scenario, leading to an overreaction until eventually things calm down. It's partly one of the reasons why the stock market declined over these last few days, with the announcement that the Bank of England would undergo a sudden rate hike to combat inflation.

This was unexpected and it freaked out the United States, thinking if it could happen to them, it could happen to us too. But as we've seen, long-term rate hikes don't have a permanent effect on pricing. It's not like interest rates increase and then the stock market just stops going up forever until those interest rates go back down. That's why it's important to stay the course and keep investing as usual.

And what better way to stay the course, by the way, than a free stock down below in the description when you sign up for public and just use the code Graham? Because that stock is worth all the way up to a thousand dollars. So if the market dips, just use that as an opportunity to buy in at an even lower price. And then just don't panic if things drop even further.

In 2018, we saw nearly a 20 percent drop until things started to recover, and had you invested during that time, you would be up over a hundred percent. At the same time, if the markets keep going up, you'll be glad you didn't sell. So either way, keep buying, realize that this is not something that's never happened before in history, and no matter what, keep smashing the like button for the YouTube algorithm and subscribe if you haven't done that already.

So with that said, you guys, thank you so much for watching. Also, feel free to add me on Instagram and on my second channel, The Graham Stephan Show. I post there every single day. I'm out posting here, so if you want to see a brand new video from me every single day, make sure to add yourself to that. Thank you so much for watching, and until next time.