BREAKING: The Federal Reserve Rate Hike (Major Changes Explained)

What's up, Graham? It's guys here. So, we've just had a major announcement from the Federal Reserve that changes everything. With their 10th rate hike now going into effect, you're going to want to hear this. After all, higher interest rates have already stressed banks to the point of failure. Housing is expected to fall by another 10% year over year, and some experts believe that the stock market could still fall by as much as 60% if the Fed does not make some drastic changes fast.

So, if you're curious what the Federal Reserve just said and why the market could have another potential freak-out, keep watching. Because we're going to discuss exactly what happened, their latest warning for the economy, and what they say is going to happen throughout these next 12 months. Since most likely this is going to have a direct impact on you and your wallet.

Although, before we start, as usual, if you appreciate the information, it does help out tremendously if you subscribe. And if you click the notification bell, you'll make sure not to miss any future uploads. Thank you guys so much, and also, a big thank you to public.com for sponsoring this video, but more on that later.

Alright, so before we talk about the Fed's plan for the rest of the year, it's important that we cover some of the irreversible damage that's already been done. Like first, the banking crisis. Look, it's no surprise that throughout the last few months, four major banks have failed, including Silvergate, Signature, Silicon Valley, and the most recent First Republic. At the core, all of these institutions face significant losses on their balance sheet as a result of higher interest rates.

But as far as who's to blame, it really just depends on how you look at it. On the one side, banks believe that the Fed had irresponsibly raised interest rates faster than they should have. Even today, banks are holding on to more than 600 billion dollars worth of unrealized losses, all because we're seeing the fastest rate hikes ever in history. But on the other side, the Federal Reserve says that the banks were simply a victim of poor management while indiscriminately holding onto large loans.

So far, other banks have been able to step in to prevent an all-out panic. Beyond that though, we also have a second issue, and that would be the national debt. Just consider that as of right now, the United States has to pay interest on the roughly 31.4 trillion dollars it borrows to keep our economy running. Now, previously, when interest rates were near zero, paying off that interest was relatively simple because, for the most part, it was free.

But today, with rates at their highest points since 2004, those interest payments are expected to reach a record amount and are likely only going to go higher over the next 10 years, which means they're going to have to find a new way to pay for it. And finally, third, because debt is costing more, consumers have less money left over to save. For example, BlackRock recently reported that the personal savings rate took one of the hardest hits throughout 2022.

When there's less disposable income, inevitably that's going to hit our next topic, and that would be the housing market. Now admittedly, as someone who has been involved full-time in real estate since 2008 as both a real estate agent, investor, and landlord, this is the one that probably makes the least amount of sense. Because with mortgage rates at the highest level in almost 20 years, the housing market has yet to see a dramatic crash outside of a few select cities.

Now, when it comes to the reason why and whether or not that's going to change anytime soon, look no further than Redfin, who compiles a monthly report on the entire housing market. This latest report is really interesting, or at least interesting for me, because this is what I find fun for some reason—I'm weird.

Anyway, on a broad level, Redfin reported that new listings are down more than 20% from a year ago as homeowners hang on to low mortgage rates. That's causing buyers to snap up homes quickly and keeping prices from falling further. On top of that, because there are so few sellers, the homes that are on the market are selling slightly faster than expected, with nearly half the homes on the market selling within two weeks—the highest portion in nearly a year.

Of course, it is true that prices are declining, with national values down 2.8%, and some areas, like Austin, Texas, down as much as 13.7%. But by and large, there are still more people looking to buy a home than those wanting to sell, and that is keeping prices from falling. Personally, as a homeowner myself, it makes absolutely no sense to sell right now if that meant giving up a 2.8% mortgage rate for something along the lines of 6.7%.

Just for some context, I'm currently paying five thousand thirty-two dollars a month for my mortgage here in Las Vegas. If I were to sell and get the exact same home today at 6.7%, my mortgage payment would be eight thousand sixty-six dollars a month for the exact same thing. Therefore, it just makes no sense for a lot of people to sell, even if housing values continue going down.

On top of that, buyer activity is heating up now that we're entering the busy times of spring and summer for real estate. Touring activity is up 28% from the start of the year compared with the 17% increase at the same time last year. In addition to that, as you can see, new listings are also at the lowest point they've been since 2020, giving the housing market yet another lifeline to stay afloat.

However, could the same thing also be said about the stock market? When it comes to this, the honest answer is, it really just depends on who you listen to and what data you look at. So, to give you the full perspective, let's discuss both the bulls and the bears.

On the one hand, the hedge fund manager John Hussman, who's reportedly called both the 2000 and 2008 stock market crashes, says that at present, our most reliable equity market valuations remain more extreme than at any other point in history prior to July of 2020, with the exception of a few months directly surrounding the 1929 peak and two weeks in April of 1930.

As a result, he expects to see negative 10% to 12% year S&P 500 total returns, with the prospect of interim losses on the order of 60%. However, on a positive side, stock market earnings are relatively strong. The job market is still near its lowest unemployment rate in 54 years, and Bank of America believes that we could see 16% more upside for the S&P 500 throughout these next 12 months.

Their reasoning is that right now, the sell-side consensus indicator is relatively bearish, and when this level is low, the stock market tends to do the opposite by moving back up. They also believe that right now, investors are favoring bonds and treasuries to stocks, which would suggest that there could be a lot of dry powder ready to hit the market if and when things reverse.

That is precisely why we should talk about the latest Federal Reserve rate hike and what they say is likely to happen over these next 12 months. Although, before we talk about Jerome Powell's latest comments, remember there are ways to take advantage of higher interest rates. For example, like I mentioned earlier, treasuries are paying out some of the highest amounts that we've seen in the last two decades, and companies like BlackRock are beginning to add them to their portfolio in the middle of potential turmoil.

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And now, with that said, let's get back to the video. Alright, now in terms of what just happened and the new changes going into effect, the Federal Reserve decided to raise interest rates by an additional 25 basis points, bringing us one step closer to reaching what's called the terminal federal funds rate. This is simply the highest interest rate that they expect to hit before eventually coming back down.

As of today, we hit that rate which is between 5% and 5.25%. Of course, in terms of the largest new developments, they've removed language from the report that says, "In determining the extent of future increases in the target range," which pretty much implies that they're done with rate hikes for now and will take a wait-and-see approach to determine if any future increases are necessary, which is huge. Essentially, they were able to hit their target, and if inflation begins coming back down, they could hold it here for a little while longer to see if their plan is working.

If it does, great. But if not, then we may see future rate hikes towards the end of the year, but that's yet to be seen. They've also openly acknowledged that we are seeing tighter credit conditions, or basically, people are getting fewer loans at lower amounts, which is weighing down on the economy exactly as they planned.

Overall, this report and his speech suggest that everything is moving in the direction that they want. They've done everything that they can as of right now, and the rest relies on the economic data that we'll see over these next few months. Beyond that though, in terms of the rest of the economy, I personally believe that the largest impact we're likely going to see will come in the form of less lending, tighter policies, and more failures.

But in the big picture, it might not be that big of a deal. For example, Jamie Dimon from JP Morgan believes that the current banking crisis makes no difference in terms of whether or not we're likely to see a recession in 2023. As of now, some economists are even beginning to argue that growth is picking back up. They also note that wage gains are finally beginning to outstrip price changes in recent months, meaning that consumers may finally once again have some disposable income to spend.

Now sure, that does potentially jeopardize the Fed's plan to slow down and reduce inflation, but on the earning side, more income could bode well for a soft landing that keeps our economy running without hitting the fan. That's why the biggest immediate concern for me seems to be coming in the form of a credit crunch while banks lend less money to fewer people, and higher rates make it more difficult for the average person to afford a loan.

In addition to that, there's also the concern of the debt ceiling being reached as soon as June 1st, which means if the United States defaults or gets really, really close, that could spell disaster for the stock market. But we'll save that one for another time. Or I guess, if you want to hear topics like this before I'm able to make a full video on them, I do have a newsletter down below in the description that you can sign up for.

Signing up gives me a good understanding of which topics you want to see more of, so it'll be the link in the description. Anyway, as far as what I think about all of this, as usual, I don't think we got that much more information that we didn't already know, which is that the Fed is committed to fighting inflation through taking it month by month. They're willing to pivot as needed, and they'll keep rates higher if inflation doesn't subside.

As of now, our next inflation report is scheduled for May 10th, which is expected to remain on a downward trend or at least remain neutral given that people are starting to spend more money. I tend to think that these next few months will tell us a lot more about whether or not their plan is actually working. If inflation does begin to subside, then perhaps we might begin to see rates coming back down, at which point anything can happen.

That's why I'm personally just taking the boring approach by diversifying as much as possible, keeping some cash on the sidelines in the event a good real estate deal comes up, and dollar-cost averaging through a diverse group of index funds that I'm not planning to touch for the next 20 years. Sure, it's rather boring and unsophisticated, but it's been shown time and time again that no one has any clue what's going to happen in the market—not even Michael Burry.

So with that said, you guys, thank you so much for watching. As always, feel free to add me on Instagram, and don't forget that you can get a free stock with your sponsor, public.com, down below in the description when you make a deposit with code Graham because that could be worth all the way up to a thousand dollars. Enjoy! Thank you so much for watching, and until next time.