THE FED JUST FLIPPED THE MARKET | Major Changes Explained

What's up guys, it's Graham here. So, we gotta have a talk. As of a few hours ago, the Federal Reserve just raised their benchmark interest rates by another 75 basis points, which means we are officially sitting at the highest interest rates that we've seen since early 2018. Marking the end of an era where money was and used to be completely free. And as of now, we're just one rate hike away from breaking that trend entirely and potentially entering a new era of investing that most people have never seen in their lifetime.

So let's talk about what just happened, the new changes taking place, which of your investments are most likely to be affected, and then how you could use this information to make you money, especially when the Fed just completely flipped the market. Although, before we start, just like the Fed raised rates, it would mean a lot to me if you raised that like button and subscribed for the YouTube algorithm if you haven't done that already. Doing that is totally free. It takes just a split second, and as a thank you, here's a picture of a lobster.

So thank you guys so much, and also, a big thank you to Scaler for sponsoring this video, but more on that later. Alright guys, a really quick background for those unaware. The Federal Reserve raises these interest rates to help combat inflation with the philosophy that the higher the interest rates go, the fewer people borrow money, the less people spend. In an ideal world, the slower prices increase, like the United States has done their best to maintain a safe, stable, and consistent amount of inflation every single year that generally hovers between one and three percent.

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. And as I'm sure you've seen, it's out of control, and wages simply cannot rise fast enough. That's why the higher inflation goes and the longer it persists, the more rate increases we're likely to see. So if that happens, there are going to be some winners and losers that we need to talk about, especially if you want to make sure you're in the best position possible not to be a loser.

That sounds really bad to say, but you get the point I'm trying to make. Well, to start, let's talk about the aspects of our economy which will be hit hardest by higher interest rates. The most obvious is going to be real estate. Since January, mortgage rates have quite literally doubled from 2.8% to 5.6%. And as of right now, we're sitting at some of the highest interest rates since 2009.

So to see just how big of a deal that is, consider this: if you got a $300,000 mortgage back in January, that would cost you $1,265 a month at a 3% interest rate. But today, that exact same loan is going to cost you $1,700 a month at a 5% interest rate. Now for rates increased to 7%, that's now going to cost you $1,996 dollars a month, and at 8%, it's almost doubled from where it originally started. All of that is to say that the higher the interest rates go, the more difficult it is to finance a property.

And that's beginning to show. The chief economist at Moody's Analytics recently said that he believes the housing market is about to enter a deep freeze as first-time buyers are locked out of the market from higher prices and rising rates. So what's the alternative, you might ask? Well, at least it's a good time to rent. Oh wait, actually no, those prices are going up too. Never mind.

Now, in all seriousness, as long as you're confident that you'll keep your job, you have a strong income, and you could patiently wait for the right deal to come along, then there's no harm in buying now as long as you plan to keep it at least seven to ten years. Some studies even show that home prices continue to rise in high inflation environments, so nominal prices could stay the exact same. Of course, in the short term, I'll admit it's nearly impossible to predict how anything is going to react, but generally, long-term home prices tend to trend upwards.

So if you're a buyer, these changes shouldn't completely derail your plans. And if interest rates ever come down in the future, you could always refinance at a lower rate. Now, the second loser could unfortunately be the stock market. When it comes to interest rates, there is no shortage of charts and graphs out there showing that stock prices took off the moment interest rates started to decline, drawing the conclusion that the opposite must also be true if interest rates go up.

And on the most basic level, they're kind of right. After all, low interest rates help fuel growth by making money cheap and accessible to borrow, and it incentivizes people to spend more money. But surprisingly, there's not a one-size-fits-all approach that says that high interest rates are bad and low interest rates are good.

And this is what I found the most surprising. Since the 1960s, even throughout interest rate increases and decreases, the stock market has continued to trend higher. If we then take an even closer look at most recently 2017, we could see that throughout several rate hikes, the market defied the odds and kept going up. This becomes even more apparent when you start to look at real rates, which is the interest rate minus inflation.

In this case, BlackRock explains that higher real rates could actually be positive for stock prices causing them to increase. Of course, we are at a very different time right now where interest rates are still negative when you account for inflation, and that could very well change in the future. But overall, it's assumed that as long as the Federal Reserve slowly and effectively communicates their intentions to the market so that everyone doesn't panic, rising rates shouldn't be a complete disaster.

In my opinion, the bigger impact on stocks is not so much rising interest rates by themselves, but instead the impact of slowing growth, less demand throughout our economy, and the word that everyone fears: a recession. Remember how I mentioned the neutral interest rate? Well, yeah, about that. Achieving that rate has one very negative consequence, with the senior Federal Reserve staff member pointing out that an economic downturn followed every single time the Fed matched interest rates with inflation.

So yes, if we're going to be technical about it, a recession is defined as two consecutive quarters of declining GDP. But some estimates say that we have a 50% chance of confirming a recession in the next 12 months. Well, the stock market implies an 85% chance of this happening. Although regardless of the odds, there are some consequences that are worth pointing out.

For example, the Economic Policy Institute found that throughout recessions, there tends to be a complete contraction throughout our country, like:

1. Job losses. As companies anticipate lower earnings, they'll seek to cut costs, and if extra staff isn't needed, that leads to higher unemployment.
2. Declining wages. A study in 2009 found that the average worker saw a 6% to 7% income loss for each one percentage point increase in unemployment rate, and even after 15 years, the loss is still 2.5%.
3. Less private investment. Just like businesses scale back, investors also tend to make safer, smaller investments, and that in turn leads to less economic growth and less economic output.

But in terms of the overall market and which industries are actually going to benefit from higher rates, here's what you need to know. Because if you hear this out, it could wind up making you a lot of money. Although before we go on to that, here's the thing.

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Alright, now in terms of who could benefit from the Federal Reserve raising interest rates, the most obvious would be savers. Like, for the last two years, you've probably noticed that most high-interest savings accounts were not paying you high interest at all. This was partially done as an incentive for people to spend and invest their cash because otherwise, if they kept sitting in a savings account, they would lose value to inflation.

But now that the Federal Reserve has begun to raise rates, savings accounts are actually paying you a healthy amount—like the good old days when Ally Bank used to pay 2.2% and a savings account could outperform the stock market. So, in terms of where these magical money accounts exist, these are my top five favorite banks paying a good amount of interest, and most likely, these amounts are going even higher.

First, we got Ally Bank. This is a company that I've been with for over a decade, and they're currently offering a 1.25% interest rate within their completely free savings account. Second, we got Marcus by Goldman Sachs. This is another completely free savings account that pays you 1.2%, and they've got really great reviews. Third, we got Sofi, who's currently offering one and a half percent, and they'll give you up to $300 when you sign up and set up direct deposit.

Fourth, CIT Bank is one of the highest at 1.65%. And fifth, one who's paying the most is Citizens Bank at 1.75%, even though this is not a bank that I've ever had any first-hand experience with, but it does seem good. All of that is to say that if you're saving money, yes, you are losing some to inflation, but at least you're getting paid something back that's not 0.01%.

The second winner from all of this is going to be anyone who has a fixed-rate loan. That's because as long as you've locked in your interest rate, it's not going to be impacted whatsoever by the Federal Reserve's decision. So your payment stays exactly the same. On top of that, if inflation stays high, the net impact of your debt becomes easier to pay off with future dollars.

After all, it would be like borrowing $1,000 back in 1990s money and then paying it off with today's money. That just makes the debt significantly easier to pay off the longer you don't pay it off. That's why it might be a great time right now to lock in a fixed-rate loan, and then you're insulated on whatever happens in the future.

Finally, long term, the third winner would be all of us. Even though it's going to take time, high inflation and rising costs are not a sign of a healthy, balanced economy. And if higher interest rates are able to reduce that growing cost, then eventually things should begin to normalize. As hard as it might be to say, we really need a complete market reset in terms of excessively valued, well, everything, and maybe this could be a way to get things back on track in a way that's a lot more sustainable.

In fact, Jerome Powell had a lot to say about this. In terms of their future outlook, here's what they mentioned: with this rate hike, it was noted that recent indicators of spending and production have softened, indicating that potentially we could start to see the reversal of sky-high consumer prices. It was even mentioned that they would begin slowing the rate increases if inflation begins to subside.

And as of today, we could already be at a neutral rate of interest, which means that this could be the last of any major rate hikes, unless, of course, we see signs of worsening inflation. Of course, keep in mind that the next meeting is going to be in September, so these next two months are very much going to be a wait and see approach, and then they can adjust accordingly. On top of that, Jerome Powell also went on record to say that he doesn't believe we're currently in a recession because we have a very strong labor market.

And even if we do see declining GDP, it’s a good thing to help soften demand. Or in other words, even if we do see a technical recession, for the Federal Reserve, it's not actually a recession. In their words, as a result from all of this, they've been able to successfully flip the market.

Now, whether or not the pain is behind us has yet to be seen. But since this has been such a highly anticipated event, it's expected that we're going to see more volatility than usual. And then hopefully from there, the market could begin to look forward to a brand new environment. Ultimately, as the previous examples have shown, US stocks and real estate continue to move even higher over the long term.

So even though anything could happen, I'm not changing anything except, thank you again to Scaler for sponsoring today's video. Don't forget to visit the link down below in the description to visit the free live class and start your journey to better career opportunities. So enjoy. Thank you so much, and until next time!