The year 2022 has been a rollercoaster for the market, with the Fed lifting rates every other month. The Central banking system, which controls the monetary system in the U.S. to alleviate possible financial crises, has been very active this year.
It has adopted an aggressive stance to combat the runaway inflation that has been roaring its ugly head since the COVID-19 pandemic hit the global scene. Things have only been worsened by energy shortages occasioned by the Russian invasion of Ukraine.
The year-over-year inflation in August 2022 was 8.3% compared to 7.480% in January 2022. September CPI data is not yet out, but no miracles are expected any time soon.
Rising Interest Rates
The Fed has been on an interest rate-increasing spree, and in September, the Chair, Mr. Joreme Power vowed to hike rates to combat inflation. In his address, the Central Bank leader emphasized his commitment to bringing inflation down and reminded Americans of lessons taught by history on the effects of loosening monetary policy too early.
Rates To Surge In November and December
Americans are not yet out of the woods because the Fed has hinted at raising rates by 1.25 percentage points before the year officially ends.
Notably, there are only two more meetings until the end, which could signal another 75 basis point rise in November, followed by a half a point hike in December. Essentially, this will bring the total fed rate to between 4.25% to 4.5% before 2022 winds up.
Market Reactions
Markets reacted quickly to Jerome’s remarks on strike, with the major Wall Street stocks recoiling. The S&P 500 plunged 3.4% after the comments from the Fed head that the commitment to lower inflation by hiking rates is unconditional.
Further, Dow Jones tumbled 1200 points as investors reacted to the hot inflation report. The Nasdaq composite sank 9.1% due to the Fed’s interest hike. Going by the trends, it’s been the worst year for the stock market in more than a decade. Unfortunately, it keeps getting worse.
The Impact on the Forex market has been noted as the dollar rallies against other major world currencies. The rising inflation continues to fuel the dollar’s strength. Notably, the dollar index, which assesses the greenback against the top six currencies, rose to 0.671% in August.
Borrowers Feeling The Heat
As the Fed continues to raise the interest rates, the banks are also adjusting the rates at which they lend money to their customers. Whether it’s personal loan vs business loan, this is likely to impact the overall cost of borrowing.
Borrowers with fixed rates loans may not feel the impact of interest hikes because their loan cost remains the same regardless of the market shakes. However, you’ll pay more for your debt if you have a variable-rate loan.
For instance, the average credit card rate climbed to 18.44% in September 2022, the highest in over three decades. Analysts predict the average APR will rise to 19% as the interest rates continue to surge.
On the same note, the U.S mortgage rates rose to 6.7%, the highest since the great recession 15 years ago. The rapidly rising rates pose a threat to home buyers. Indeed, pending home sales dropped 0.4% compared to the previous year’s.
Business loan uptake remains relatively weak amid rising interest and lenders recalibrating pricing to match the rates. Experts predict that small business loan costs could rise by 9% by the close of the year.
The Bottom Line- Looking Beyond 2022
Looking into 2023, the market is bracing for higher rates, and the implications are stark. As the central bank grapples with the major task of stabilizing inflation and cooling the economy, it’s more painful for businesses and households because there seems to be no pivot.
Whereas savers are laughing all the way to the bank thanks to high bond yields, banks have been raising their interests at the same breakneck speed on their product offerings to consumers. It has increased the costs of mortgages, cars, personal and business loans. Analysts are putting the odds of a recession at up to 52% by the close of 2023.
