The FED Just Crashed The Market | Major Changes Explained*

What's up guys, it's Graham here. So, as of a few hours ago, the Federal Reserve just raised their benchmark interest rates by another 75 basis points, which means as of today we are now sitting at the highest interest rates that we've seen since 2008. This also marks the end of the free money era that was started over 40 years ago, where every rate increase was unable to surpass the previous high before it. But now we've completely broken that trend, and the money printer is officially turned off.

That's why it's incredibly important to cover exactly what they say is going to happen throughout the next year, the biggest changes being made, what this means for you, and most importantly, how you could use this information to make you money. Although before we start, since the Federal Reserve just raised rates, it would mean a lot to me if you raised that like button and subscribed for the YouTube algorithm. Doing that helps out the channel tremendously; it makes all the last minute reporting totally worth it. And as a thank you, here's a picture of Jerome Powell.

Alright, now to start, all of this begins with the word: investors hate inflation. On a really basic level, this is simply the rate in which products and services increase in price over time, lowering the value of your money today. Recently, inflation has been the driver for every single rate increase that we're about to see. That's because when the Federal Reserve raises rates, they do so by looking at how much prices are increasing both month after month and year after year, and then adjusting those policies in such a way to bring those prices back down.

In the short term, this means more pain in the markets, less demand for consumers, and according to analysts, a higher unemployment rate while fewer jobs are created. But in terms of what this most recent inflation report indicated, as well as its impact in the rate hike that we just saw today, here's what you need to know. The latest inflation report was released on Tuesday, September 13th, and to everyone's surprise, it was an absolute disaster. That's because inflation was largely expected to go down; after all, it had already decreased from 9.1 down to eight and a half percent, and gas prices were falling.

So, the expectation was that we should see inflation go down to eight percent. But nope, instead that number was 8.3 percent year over year, with a month-over-month increase to 0.1 percent. This implies that inflation is not going down as quickly as expected. Costs are continuing to increase throughout certain sectors, and even with energy prices having fallen, other categories are costing more, leading Americans to have even less money left over under this latest report.

In just the last month, food and medical care increased by 0.8 percent, shelter is up another 0.7 percent, and new vehicle sales are still costing more than the month prior. On top of that, core inflation, which excludes food and energy prices, increased by 0.6 percent month over month, signaling that this isn't just a random anomaly and that prices are increasing above the Federal Reserve's control.

Now, in terms of raising rates, the Federal Reserve has made it clear that they intend to continue their rate hikes to fight inflation until the job is done. And when is that, you might ask? Well, all of that has to do with what they call their two percent target. Even though you and I might see used car prices going up 40 percent, record-high oil prices, and two thousand dollar median rent, the Federal Reserve has to balance the effects of maintaining maximum employment and price stability.

After all, if they lower interest rates too much, then prices rise too fast. But if they raise interest rates too much, then unemployment increases. Because of that, there's a fine balance between making sure the economy is growing and making sure businesses are doing well enough to keep people on payroll. That's resulted in a two percent inflation target that the United States, Canada, Japan, Sweden, and the European Central Bank have all agreed on.

What's even more remarkable is that the entire policy was simply the result of an offhand remark from New Zealand, who said that they wanted to target one percent, and then they rounded up to two percent to give a margin of error. And voila, the two percent inflation target was born. This set the expectation that inflation wouldn't be so low that people hoard onto their cash, but it also wouldn't be so high that people's savings are completely eroded away.

And that is what the Federal Reserve is aiming for. The goal here is that they'll continue to raise interest rates, soften demand by increasing borrowing costs, let businesses contract, and then eventually inflation will return to its normal target. Although the difficult part comes where if the Federal Reserve stops too soon, they might not make a lasting impact, but if they go too far, they could end up sending the entire economy into a recession or, even worse, a depression.

Now, other investors like Peter Schiff believe that the two percent target is no longer going to be achievable because inflation is here to stay and will get much worse despite the rate hikes due to over a decade of inflationary monetary and fiscal policy. But in terms of what's happening right now, what the Federal Reserve just said, and how this is going to impact your investments from savings, real estate, and stocks, here's what you need to know.

Alright, so in terms of what the Federal Reserve just said, as of a few hours ago, they delivered a swift blow to the markets by reiterating a rather negative forecast in the future and confirming that they intend to raise rates even higher than expected throughout the rest of 2022. How high, you might ask? Well, they said that we're most likely going to see another 75 basis point rate hike at their next meeting in November, along with another 50 basis point rate hike in December, putting us at some of the highest rates that we've seen since prior to the Great Recession.

In addition to that, they also made it apparent that they expect 2022 to see next to no GDP growth at just 0.2 percent, and they revised every single other projection downwards, implying that our economy is going to slow down further than expected, potentially bringing us through an economic recession. Of course, they call it below trend growth of zero to two percent, which sounds a lot more gentle.

Although at the core, they're setting the expectation that our economy is likely not going to rebound anytime soon and that our economy is and will slow down further than they think. Because of that, they mentioned that a soft landing will be challenging and will ultimately depend on how long prices stay high. After all, they understand that inflation is largely driven by supply shocks, the Russia-Ukraine war, and a whole bunch of other factors that they have absolutely no control over.

So, the longer these issues persist, the worse it's going to be for our economy. Jerome Powell also said that it's important that they hike rates now while earnings are still strong and unemployment is still low and that the economy could absorb it, then wait for the economy to overheat, and then it'll be much more difficult to get back under control.

In addition to that, they also mentioned that the unemployment rate is likely going to increase in their efforts to restore price stability, going from 3.8 percent to 4.4 percent next year. And for all intents and purposes, we're likely going to see fewer job openings until things begin to reverse in 2025. The goal is that they want the jobs market to meet demand - no more and no less. That way, wages won't have to increase higher than expected, driving up prices even further.

But they did say that the housing market is likely to go through a correction while prices reset to a new normal following higher mortgage rates. In his words, the housing market is not balanced, and rate increases should help normalize the economy so that houses aren't getting 10 percent over asking for the first buyer that comes along as soon as it hits the market.

Now, in terms of how much of a correction we could see, by definition, it's a decline of 10 to no more than 20 percent off peak price. So, if he's correct, we could see housing prices return to the levels that they were back in 2021. Overall though, this entire meeting was rather bearish, with a very clear message that rates are going higher, they're staying higher for longer, and unemployment is probably going to increase.

This is a very different message than his previous meetings, where he said that he was committed to fighting inflation while giving a rosy picture for the future. This time, not so much. On top of that, there's one more aspect that everybody needs to be made aware of, and that's the fact that as of a few days ago, the Federal Reserve has stopped purchasing mortgage-backed securities, which have largely kept mortgage rates low and made it easy for banks to issue more loans.

As you can see, that amount of their stimulus has remained consistent since the beginning of the year, but now that they've eliminated their mortgage buying entirely, it's presumed that mortgage rates will get more expensive and that will put downward pressure on home prices. Now in terms of inflation though, the good news is that gas prices are continuing to fall, national wage growth isn't skyrocketing or leading to a wage-price spiral, and supply chains are beginning to normalize.

But it is evident that the Fed will continue to raise rates to combat inflation, with even the central bank going on record to say that "I could assure you that my colleagues and I are strongly committed to this project and we will keep at it until the job is done." That's why, in my opinion, now is a really good time to make sure you have an emergency fund sitting on the sidelines in cash.

Take advantage of high-yield savings accounts that are finally beginning to pay you a respectable amount of interest. And since no one really knows what's going to happen, keep investing consistently. Even though it seems like the market will continue to go down, the truth is no one knows exactly how long it's going to last or where exactly it's going to settle.

That's why I stick with my normal schedule, continue to dollar-cost average into the markets on a regular basis, and always, no matter what, smash the like button for the YouTube algorithm. So with that said, guys, thank you so much for watching. Also, feel free to add me on Instagram. Thank you so much for watching, and until next time!