The Finatical
Week of November 22nd, 2022 - Federal Funds Rate, Rise in Interest Rates, Payrolls Increase
Topic Breakdown - Federal Funds Rate
Introduction
The U.S. Federal Reserve's primary benchmark interest rate is the "federal funds rate", and it determines how much customers pay to borrow money (how much interest they need to pay on their loan). The federal funds rate and interest rates are not technically the same, but their relationship is very complex, so the important thing to remember is that the fed funds rate and interest rates are correlated. If the fed funds rate increases by a certain percentage, interest rates would increase by around the same percent. When you see in the news that the Fed has increased or decreased interest rates, it implies that the Federal Reserve has decided to change the federal funds rate. Typically, the Fed would increase the fed funds rate/interest rates to combat rising inflation, which is what we see today, but they could also lower this to boost the economy.
Its Significance
So you may be asking why we should pay attention to the federal funds rate, and this is because one of the most significant interest rates in our economy is the federal funds rate. This is because it has a direct impact on our monetary conditions, and this has an impact on important elements of the overall economy such as unemployment, development, and inflation. If you are an active investor in the stock market, you should also be checking out the federal funds rate, since changes to the fed funds rate changes often have a big impact on the stock market. For instance, a slight drop in the rate might cause the market to soar higher as business borrowing expenses decrease. To try to gain a sense of where the target rate may be heading, many stock analysts pay close attention to this important rate.
Its History
We can also learn a lot by looking at the federal funds rate’s past. The federal funds rate has fluctuated over the past 50 years as the Fed has tried to regulate the economy, from a low of 0% to a high of 20%. To combat high inflation in 1980, the fed fund rate increased to an all-time high of 20%. Higher interest rates often result in less borrowing and expenditure since it is more expensive for households and companies to get credit, and this thereby curbs inflation. To help the economy recover from the Great Recession, the Federal Reserve cut the fed funds rate to 0% in 2008. To lessen the effects of Covid-19 on the economy, it repeated this action in 2020. Lower rates make it easier for borrowers to get loans and credit, which encourages spending and boosts the economy.
Financial Trends
Fed Raises Interest Rates To Their Highest Level Since 2008
As expected, the Federal Reserve approved a fourth consecutive 0.75-point interest rate increase and has provided plans on how it will approach upcoming monetary policies to bring down inflation. The central bank also raised its short-term borrowing rate by 0.75 point interest rate as well to a target range of 4%, which is the highest level since January 2008. The new statement by the Feds seems like they are hinting towards a policy change in determining future interest rate hikes, “We will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments”.
Economists and citizens of the nation are optimistic that this is the infamous “step-down” in policy that could undergo a rate increase of half a point increase at the December Fed meeting and following smaller hikes in 2023. The Committee is expected to anticipate that ongoing increases in the target range will be appropriate to attain a class of monetary policy that is restrictive enough for returning inflation down to 2% over time. Despite, stocks initially rising after the announcement of bringing inflation down to 2% in the upcoming years, it shortly started to drop during Chairman Jerome Powell’s news conference as the market attempted to gauge whether the Fed believes it can enforce a conservative policy that would include a slower pace of rate hikes for accomplishing their inflation goals.
U.S. Payrolls Increase By 261k
Many financial analysts and economists expected job growth to witness a significant drop, however, it was stronger than expected in the month of October despite the Federal Reserve interest rate increases, designed to slow down the strong labor market. According to the Labor Department, nonfarm payroll grew by 261,000 while the unemployment rate increased to 3.7%. These payroll numbers were better than the Dow Jones estimate for 205,000 more jobs but worse than the 3.5% estimate for the unemployment rate. Although the payroll numbers were better than projections, it is still marked in history as the slowest pace of job gains since December 2020, in the middle of the pandemic.
Additionally, the release of nonfarm payrolls, led to stocks rising in value, while Treasury yields also continued to yield higher returns. The wage growth is likely to serve as a price pressure as worker pay is still well below the rate of inflation, with average hourly earnings growing by 4.7% from last year and 0.4% for the month. The shift in market pricing is an indication of the Fed leaning towards a 0.5 percentage point interest rate hike that would be less aggressive than 0.75 hikes. Healthcare and technical services led job gains, with healthcare adding 53,000 new positions and technical services creating 43,000 new jobs. There is still a lot of work to be done as Marvin Loh, senior global macro strategist at State Street commented, “Job gains were fairly widespread, but overall wage gains are still too high”.
Financial Guidance
“Passion is the genesis of genius.” — Tony Robbins
Geniuses are those who give everything and more for whatever they excel in, which cannot be done unless there is genuine passion towards whatever it is.
Term of the Week
Fiscal Conservatism: fiscal conservatism is the belief that minimal government involvement is the best for the economy. Those who are fiscal conservatives believe in tax cuts, minimal regulations, and many other measures that minimize the government’s role in the economy.