The FED Just Crashed The Market (Major Changes Explained)

What's up, Graham? It's guys here, and it's official. As of a few hours ago, the Federal Reserve just raised their benchmark interest rates by another 25 basis points, which means as of today we are sitting at the highest interest rates that we have seen since early 2007, right before the great financial crisis. Apparently, this is just the very beginning. After all, home sales just posted their first year-over-year decline in more than a decade. JP Morgan warns that we're already past the point of no return, and the Federal Reserve has indicated that they're nowhere close to being done.

That's why it's incredibly important that we discuss exactly what they say is going to happen throughout the rest of 2023, the new changes taking place, and which of your investments are most likely to be impacted. On this episode of "A Man Is Suing Buffalo Wild Wings," because they're charging too much for its boneless wings, which are basically nuggets. Although, before we start, as usual, if you appreciate the nuggets of information in this video, it does help out tremendously if you subscribe. If you want to be kept up to date on topics like this and more detail that I'm able to cover in a video, feel free to add my newsletter down below in the description. Again, it's totally free, so thank you guys so much, and now with that said, let's begin.

Alright, so before we talk about the most recent rate hike and the Federal Reserve's outlook for the rest of 2023, we have to talk about the latest inflation report. Because once you understand this, everything else is going to begin to make a lot of sense. See, throughout 2022, the Federal Reserve increased their interest rates from zero percent to four and a half percent in their fastest rate hike ever in history. As a result, inflation has been steadily falling from its peak of 9.1 percent back in June of 2022. However, it's still nowhere close to being over.

That's because on March 14th, the latest inflation report revealed that inflation is still up six percent from a year ago, with prices rising 0.4 percent from the month prior, implying that if we stay in this exact same trajectory, we could potentially see sub-5 inflation by this time next year. Now, I realize that we're absolutely getting ahead of ourselves here, and we can't just assume that everything is going to continue indefinitely at the same speed. Especially because, as we've seen with Silicon Valley Bank, anything can change on a moment's notice like the FED skyrocketing balance sheet.

But in terms of what's leading inflation right now, the biggest contributors are none other than housing. They reported the overall cost for shelter increased by 0.8 percent month-over-month or 8.1 percent year-over-year, which is a big deal when housing makes up over a third of the overall inflation reading. On top of that, when you dig a little bit further, you'll see that the rent index also rose by 0.8 percent month-over-month, and owner's equivalent rent rose by 0.7 percent month-over-month, suggesting that inflation is sticking around a lot longer than we expected.

However, the good news is that rents are often seen as a lagging indicator because the data that we have today is often a reflection of the deals and leases that were signed months prior. With national rents beginning to drop, chances are that might be reflected in upcoming inflation reports. Now, in terms of everything else, though, besides food, which increased by nine and a half percent over the last year and 0.4 percent month-over-month, almost all other items declined, like energy and gasoline down 0.6 percent, used cars down 2.8 percent, and medical care services down 0.7 percent. This is a really good sign that inflation is beginning to come down.

So, in terms of the most recent rate hike as of a few hours ago and what Jerome Powell said is likely to happen over these next few months, we should first discuss the implications throughout the entire market. Because a lot is beginning to happen. All of this brings me to an extremely interesting article from The New York Times with the headline "Low Rates Were Meant to Last: Without Them, Finances in for a Rough Ride."

As they explained, the 2010s were the era of two percent, where interest rates, inflation, and growth were all around that same level until, of course, something broke. In this case, Silicon Valley Bank was one of the first dominoes to fall. The Fed's rapid rate increases caused their bond values to drop during a time the venture capital was drying up, and company expenses were also going up, causing their portfolio to take a massive hit.

Although what's very interesting is that this isn't just unique to Silicon Valley Bank. In fact, it's said that U.S. banks are currently sitting on 620 billion dollars of unrealized losses from treasuries that had fallen in value as a result of the Federal Reserve. From there, they then go on to explain that rising interest rates have been a recurring source of financial pain throughout the United States, with a sharp rise in interest rates causing the savings and loan crisis throughout the 1980s, the bursting of the dot-com bubble throughout the early 2000s, and the decline in home prices during the 2008 great financial crisis.

But even with a series of disastrous events behind us, some say that we could see a federal funds rate as high as six percent by the end of the year, and that's what leads us to what happened today. Like I mentioned earlier, the Federal Reserve raised their interest rates by an additional 25 basis points as expected, despite the banking turmoil that we've seen throughout the last week. On a broad scale, they've indicated that we could have a peak federal funds rate to 5.1 percent at the end of 2023, suggesting that we likely have two more rate hikes ahead of us on May 3rd and June 14th.

Then it'll be up to them to take a wait-and-see approach if inflation begins coming back down. If it does, it's expected that they will hold rates steady for the market to adjust. If it doesn't, then well, good luck to all of us because rates are probably going even higher. Or, I guess more simply put, they expect to keep rates higher for longer. So if everything stays the same, exactly on track, we're probably not going to see a reversal anytime this year.

Now, on a positive note, even though they did revise the GDP numbers downwards, there's nothing that indicates a recession according to them, as hard as that might be to believe. That's largely because they don't expect the unemployment rate to exceed much more than four percent, and in the process, we could avoid the hard landing that so many economists predicted. Again, who knows if this will actually come true, but according to their report, a lot of it is positive for the economy.

In addition to that, Jerome Powell also indicated that the banking crisis had a similar effect to an additional rate hike, because lenders are pulling back in credit. This allows them more room to take a step back from additional rate hikes, because the economy is slowing down one way or another. So in the big picture, that just means that they're expected to raise rates 25 basis points two more times and then they're going to hold them there throughout the rest of the year until, hopefully, inflation comes back down.

Now, in terms of the rest of the market, look no further than housing. For the first time in 10 years, national home prices saw a year-over-year decline of 1.2 percent as sellers responded to a drop in home buyer demand spurred by elevated mortgage rates. To put that into perspective, as Redfin explains, just 44 percent of homes that went under contract in February did so within two weeks, down from 60 percent from the year earlier.

In addition to that, new listings coming on the market are also incredibly low because many homeowners have already locked in their interest rates, also known as the lock-in effect. So here's the thing, as of right now, Goldman Sachs reported that 99 percent of homeowners have an interest rate below what's currently being offered on the market, and 63 percent of those loans are for between two and a half to four percent. That means the current homeowners have very little incentive to sell their house right now and get rid of an interest rate that would be significantly higher if they moved, especially if they're one of the 28 percent that have a rate below three percent.

On top of that, if a homeowner currently has a three percent mortgage, prices would have to drop by 35 percent for that identical home to have the same monthly payment as today's current rates of six and a half percent. So in many cases, it doesn't make financial sense to sell unless they absolutely have to. Now, of course, that doesn't mean that low inventory is going to lead to sellers making more money; in fact, quite the contrary. Goldman Sachs believes that housing values are on track to fall 6.1 percent throughout 2023, and this could have been much worse if it were not for a lack of new supply, which is keeping home prices relatively high, even though the market is slowing down.

But throughout all of this, there is some good news in the fact that mortgage rates recently have plummeted in the wake of the banking collapse, with some rates falling below six percent, event prompting the buyers on the sidelines to begin making offers. It's still too early to tell just how well these rates will stick or how long they’re going to be around in the foreseeable future, but overall, that's leading others like CoreLogic to believe that home prices may start to creep back up by a rate of 3.1 percent year-over-year, simply because there's still demand to buy houses once interest rates go back down.

Although that's really only the very beginning, because in addition to that, we also have the stock market. Now, the good news is that on the surface, inflation does seem to be subsiding, which in turn could be bullish for stocks that benefit from lower rates. Not to mention the S&P 500's price-to-earnings ratio's back to the same levels that we saw in 2018, thanks to falling prices.

On top of that, it's also found that back-to-back down years for the stock market are incredibly rare. For instance, the S&P 500 has only seen consecutive years of negative returns three times since 1957, suggesting that we have a good chance of being up again by the end of the year. That's because the stock market is very much forward-thinking, meaning it doesn't matter so much what's happening today, but instead what the market thinks is going to happen over the next 6 to 12 months.

And if the expectation is that we're soon approaching the terminal federal funds rate to 5.25 percent, well then we're only a few more rate hikes away from being done, as far as what analysts think is going to happen. One Reuters poll suggested that the market could end the year up five percent from today's levels. Barclays believes we could see an S&P 500 decline of 36.75. Morgan Stanley thinks we'll stay flat at 3,900, and Bank of America, along with Goldman Sachs, predicts 4,000 by the end of the year.

JP Morgan, though, is the most bullish, expecting 4,200 by December. But then again, Credit Suisse also said something similar, and yeah, we'll leave it at that. Anyway, to make things even more confusing, the Financial Samurai blog pointed out that the spread between the best and worst case scenarios is the largest that we've seen since 2009, with estimates ranging anywhere from 3,600 all the way to 5,000.

So basically, no one has any clue what's going to go on, and the market reacts to these arbitrary numbers which change by the day, which could mean absolutely nothing because everyone is out there just making their best guess. Now, as far as my own thoughts about the meeting today, I'll be honest, I don't think we got anything that we didn't already know. Like the Federal Reserve is already committed to fighting inflation; they're trying to get us back down to our two percent target, and they don't want the entire economy to implode in the process.

But the bigger issue right now is simply mitigating the banking crisis. After all, Credit Suisse was once worth almost 300 billion dollars and just sold recently for three billion dollars to UBS, even despite being given 54 billion dollars by the Swiss National Bank. Now, even though that isn't directly related to the United States, there is a lot of overlap. If investors think there could be an issue with banks, that could self-perpetuate a belief that there could actually be a problem with the banks.

Point being, there's a narrative that these rate hikes are making it more difficult for banks to stay afloat because they have money tied up in bonds that are falling in value. That's why the Fed now has to very carefully manage inflation versus the overall health of the banking system. Even though banks are getting as much liquidity as they need, like just look at the Fed's balance sheet. Essentially, they were able to buy out unprofitable bank loans and hold them to maturity, even though they've now taken on more debt.

All of this complicates an already very delicate situation. That's why I believe they're likely to continue to take a wait-and-see approach throughout the rest of the year. Remember, there's nothing that says they can't temporarily pause rate hikes in the future and then come back to it once conditions have improved. That's why it's so important to subscribe. If you haven't done that already, hit the like button, and let me know your thoughts down below in the comment section, because I'll do my best to read as many as possible.

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