THE FED JUST CRUSHED THE MARKET | Urgent Changes Explained

What's up, Grandma's guys? Here, and welp, it happened. As of a few hours ago, the Federal Reserve yet again raised their Benchmark interest rates by another 50 basis points, officially bringing us to the highest rates that we've seen since 2007, right before the great financial crisis. But this time, the outlook is a lot worse because we're about to see even more rate hikes throughout 2023. That's right—the Federal Reserve is not looking like they'll be pivoting away from fighting inflation anytime soon. As a result, they've signaled a brand new change of policies that are about to affect literally everything: from stocks, housing prices, treasury yields, and even the amount that you get paid in the savings account. This basically means another market reversal is likely coming soon.

That's why it's incredibly important that we cover exactly what they say is going to happen throughout 2023, the biggest change being made, what this means for you, and then finally how you could use this information to make you money. On this episode, a Toronto man could finally afford to buy a house after winning 55 million dollars—although, as usual, before we start in the spirit of raising interest rates, if you appreciate the timely information and you want to be kept updated on market news just like this, feel free to subscribe. It means the world to me. I post three videos every single week; it's totally free, and it's a thank you.

Here's a picture of Jerome Powell in 2020. So, thank you guys so much, and now let's begin. All right, so before we talk about the most recent rate hike as well as the Federal Reserve's warning for 2023, we should first talk about the latest inflation report that came out yesterday morning. Once you understand this, everything else will begin to make a lot of sense.

See, since 2021, we've had one main problem, and that would be inflation—or I guess, namely the fact that inflation was not going down. As you can see, we began an uptick of prices every single month that just kept going higher and higher and higher. Then 2022 was more of the same. In the first half of the year, inflation increased as high as 9.1 percent in June. Well, the Federal Reserve has ordered the larger than expected rate hikes to bring everything back down, and it appears to be working. Over the last five months, inflation has consistently begun to fall from its peak, and most recently, November's data suggests an inflation reading of 7.1 percent, which is high, but it's still significantly lower than what was expected.

That means there's a lot of data to suggest that rate hikes may be soon coming to an end, and in terms of exactly where inflation fell, here's what you need to know. See, on a broad scale, consumer inflation declined on a year-over-year basis. What's even better news is that month-over-month inflation only rose by 0.1 percent, implying that if we stay on the exact same trajectory, we could theoretically return back to 1.2 percent inflation by the end of 2023.

Of course, I realize that we're absolutely getting ahead of ourselves here, and we can't just assume that this will continue indefinitely, especially because if people believe inflation is over, they will start spending more money, making inflation less likely to be over. But in terms of what's leading inflation right now, the biggest contributor seems to be none other than housing, as they report the overall cost of shelter increased by 0.6 percent month-over-month, which is a big deal when shelter makes up a third of the overall inflation reading. On top of that, when you dig a little bit deeper, you'll see that the rent index rose by 0.8 percent month-over-month and owner's equivalent rent rose by 0.7 percent month-over-month, suggesting that rents could rise another five to seven percent.

However, I will say that in regards to these numbers, we do have some good news and some bad news. I guess we'll start with the bad news first since these inflation numbers don't use the actual rent increases; they instead use what's called owner's equivalent rent, which can be a lot less reliable. This is all obtained by asking homeowners, "If someone were to rent your home out today, how much do you think it would rent for monthly, unfurnished and without utilities?" This brings up a major red flag that many homeowners might not know what their home would accurately rent for, and it's entirely dictated by opinion instead of fact.

In addition to that, the rent index also calibrates for what's called quality adjustments, meaning they take into account newer features that were not previously available and then subtracting that from the total rent to get a base that could be a lot lower than the amount you're actually paying. However, the good news is that rents are often a lagging indicator because the data we have today is often a reflection of the months prior. With national rents now beginning to drop, chances are this will take all the way up to a year to reflect in the latest readings.

Why is this a good thing? Well, the FED understands this and they're most likely not going to use this as a tool to increase interest rates faster than absolutely necessary. As far as everything else goes, almost all items declined across the board from a month earlier, like food prices, cheaper energy, and gasoline, less money, used cars down 2.9 percent, airline fares, save three percent on your trip to getting a free stock down below in the description when you sign up for a sponsor, public.com using the code Graham.

Okay, jokes aside, besides housing, only a few items got more expensive throughout the last month, and that would be apparel, tobacco, vehicle maintenance, telephone services, laundry, and haircuts, which is a good sign that inflation is finally beginning to cool down—except for tamale prices; those are still up. So, in terms of the most recent rate hike as of a few hours ago and what Jerome Powell said is most likely going to happen throughout these next few months, we should first talk about the implications throughout the stock and housing markets because there are a lot of changes that are beginning to go into effect.

First, let's talk about the housing markets. The mortgage giant Fannie Mae found that 62 percent of consumers believe that mortgage rates will continue to go higher. Will the Federal Reserve stick to their plan of fighting inflation to the bitter end? Even though that might be true, thankfully, shelter costs are decreasing. If you look at the latest data in terms of the rent, it was found that multi-family prices dropped nine dollars a month nationally, which was the highest monthly drop in a decade. As they say, this was caused by economic headwinds and deteriorating demands, not to mention a lot more inventory.

For instance, fewer people are renting because more people are moving back in with their parents. Occupancy is falling because prices have gotten too high, not to mention they have so much excess inventory that they're selling off entire subdivisions to institutional landlords who want to rent them out. Future construction is also slowing down now that multi-family building is at a 36-year high. All of that is to say that rental prices are beginning to decline throughout the United States, and if history is any indication, this will begin showing up on CPI numbers in the middle of next year as tenants begin to renew their leases at market rents, which will likely be a lot lower than they are today.

Second, let's talk about the stock market. It's no surprise that lower-than-expected inflation is enough to send the stock market into an end-of-the-year rally. But with the Federal Reserve now expected to continue the rate hikes throughout 2023, there's the mindset that the worst could still be yet to come. That's because the market is very much forward-thinking, meaning it doesn't matter so much what's happening today but instead what the market expects to happen over the next six to 12 months. If the Federal Reserve gives anything other than great news, the market begins to panic and sell off.

Now, as far as what the experts believe is going to happen, Davis Research believes we'll see the S&P 500 at 4,300 at the end of 2023. Deutsche Bank and Oppenheimer believe that number to be 4,500, and a Reuters poll believes that to be 4,250. So basically, no one has any idea what's going to happen, and the market often reacts to arbitrary numbers that could mean absolutely nothing.

But in terms of the latest rate hikes and what Jerome Powell has to say, here's what you need to know because a lot of this will have a direct impact on you. So, as far as what just happened— as of a few hours ago, the Federal Reserve started by reducing the rate hike to 50 basis points, exactly as the market expected. But the one piece of data the market didn't price in was the fact that the Federal Reserve expects to extend the rate hikes into 2023 without dropping them back down.

See, in September, they projected to target a federal funds rate of 4.6 percent, meaning we'd likely have one or two more rate hikes left, and then we’re done. But now they've revised that upwards to 5.1 percent, suggesting that we've still got a long way to go, and that inadvertently caused the stock market to fall as it readjusted to some new information. In addition to that, the Federal Reserve also reduced their anticipated GDP from 1.1 percent growth in 2023 down to half a percent, basically hinting that we could continue to see an economic contraction over the next 12 months.

However, in the sea of the stock market turning red, there is some good news in the fact that Jerome Powell admitted to being flexible and taking the approach of implementing smaller rate hikes throughout 2023 so as to feel out the economy and not overdo it. That way, we’re not likely to have any abrupt 75 basis point rate hikes, and smaller rate increases will allow us to still fight inflation without losing everybody money. Ultimately, though, they're still just as committed to fighting inflation, and while the stock market was pricing in the chance of this soon coming to an end, it's looking as though 2023 is probably going to be a lot more of the same.

Will they try to do their best to stamp out inflation as much as possible? And finally, in terms of our future rate hikes, as of right now, it's largely expected that the federal funds rate will peak around five percent, meaning our most likely outcome is another 25 to 50 basis point rate hike in February of 2023, one more in March, and then potentially make it the pivotal moment that we've all been waiting for, where we either see a pause or even a decline for the first time in more than a year.

Now, a lot could change between now and then, but by May, it should become apparent if we're seeing a meaningful decline in inflation. If wages continue to drop, then there's absolutely the argument that they could begin to decrease interest rates in a way without spiking back up inflation. Of course, there's also the chance that they could just leave interest rates at five percent while they take a wait-and-see approach throughout our economy, at which case it's unclear just how much damage that will do versus slowly increasing interest rates over a longer period of time.

But at the end of the day, the stock market does seem to be reacting positively to the information, and I'd love to get your thoughts on what you think is going to happen. If you believe that the market's already seen its worst, comment down below and let me know why. Or if you think the market's about to see another drop, I'd also be interested in hearing your perspective. Honestly, the more opinions, the better! And no matter what, make sure to subscribe if you haven't done that already.

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 our sponsor public.com is giving you a free stock worth all the way up to a thousand dollars when you sign up using the link down below in the description with the code "Graham." Enjoy. Thank you so much, and until next time!