On March 16, Federal Reserve Chairman Jerome Powell announced the long-awaited start of the rate hike cycle. Besides the Fed raise the interest rate by 25 bps, it anticipated a 1.9% rate by the end of 2022 and 2.8% in the year later. Moreover, Fed Chair indicated further rate hikes if necessary. However, the investors' sentiment closely monitors events like interest rate decisions where the rising rates signify a possible recession where the higher inflation and extreme volatility in the stock market with recent crashes are signs of possible pains that may come in the coming days.
When the economic condition is weakened, the central bank decreases the rate to improve it. For example, after the pandemic, the Fed lowered the rate to nearly 0%, helping the country grow. As a result, the unemployment rate declined from 14.7% to 3.8%, and the GDP increased by 10.0%. However, the excessive monetary stimulation program led inflation to reach a record high. Therefore, the current job of the Fed was to slow down economic activity by raising interest rates. On the other hand, the fed raise interest rate will likely decrease the economic activity, which impacts the growth perspective of businesses. Moreover, the increased interest rate is closely connected to the stock market valuation. The discounted cash flow method to calculate the future cash inflow/outflow will be affected by the interest rate hike, resulting in a negative impact on stock valuations.
Many investors still wonder what might happen after the fed raise interest rate. In the following section, we will the effect of the fed raise interest rate in several financial markets like stocks, commodities, and cryptocurrencies.
How Does Gold Perform After The Rate Hike?
Holding onto and lending out cash is more profitable during the tightening cycle. Moreover, investors look for correlated assets like gold to relate these macroeconomic factors. In the past tightening cycles, gold reached an all-time high in the 2000s and for this time there is no possibility of showing a different impact.
In June 2004, the fed raised interest rate that pushed the gold to reach the $380 bottom. Later on, the price rallied 400% to $1900 in 2011. Similar price action was seen after 2015 when Janet Yellen’s first rate hike sent gold to the $1050 bottom before reaching the $2000 level.
The tightening cycle in 2022 will be aggressive, where the Fed forecasted six more rate hikes in 2022 and further in the next year. In the past year, the gold remained chopped between $1700 to $1900, where the current tightening cycle would be the beginning of the upcoming gold bull run.
Will The Fed Rate Hike Help Crude Oil Prices?
According to some Wall Street investment strategists, the last five Fed rate hikes worked as a bearish factor for the US Dollar. Therefore, if the same thing happens the sixth time, where the weaker US Dollar will be a bullish factor for Crude Oil.
Overall, Crude oil bulls should find a falling US oil output, strong global demand, and weaker US dollar to improve oil prices in the coming years. However, the end of the oil export ban could increase the profitability in the domestic oil business but the difference between the domestic and international prices should be in line. The WTI trades slightly $2 down from the international benchmark, Brent. Therefore, if the spread between WTI and Brent remains unchanged, the US oil producers are likely to make more money by exporting oil outside.
On the other hand, the stock market showed a negative impact after the fed raise interest rate, where further tightening in policies with the devalued US Dollar would be a bullish factor for the Crude oil price.
In the 2015 rate hike, the Gold and Crude oil showed a similar price action and for 2022, there is a possibility of doing the same by raising the oil price above $130 a barrel.
How The Fed Rate Hike Could Affect Bitcoin
The event of the fed raise interest rate would influence individuals and corporations to jump into risky assets like cryptocurrencies. Moreover, many investors believe that cryptocurrency is a tool to aid all odds like rising inflation, low-interest rate, US Dollar devaluation, lack of purchasing power, etc.
According to analysts, crypto assets had been seen as an inflation hedge, but it has acted like other risky assets in recent times. In November 2021, cryptocurrencies have reported lower liquidity after the Fed tapering and signals of an interest rate hike. However, Bitcoin might show a positive year in 2022, where institutional investors will likely offset any short-term decline.
Will rising rates derail stocks in 2022?
Rising interest rates always trigger volatility in the stock market, where the multiple fed raise interest rate in 2022 would be a year of continued volatility. However, the effect of the volatility will be short-lived if the economic condition remains strong. Based on the historical data, the Dow Jones, Nasdaq 100, and S&P 500 show recovery in about three weeks after the fed raise interest rate.
However, the Fed is likely to raise the interest rate six times this year, where the major aim is to recover from the higher inflation. Therefore, the current situation is different from other years where the current decision is not an aggressive approach, leaving room for stock markets to move higher.
Although the higher rates will devalue stocks, earnings growth will be higher to support the stock market. However, investors should closely focus on how the rising inflation is moving with the rate hike, where the failure to control the inflation would be the primary sign of the recession.
All Fed rate hikes will not impact the financial market directly, but investors should keep in mind that it is the most important part of the fundamental events. Investors must find the proper allocation of assets, especially those getting closer to retirement.
In that case, the best approach is to maintain a diversified portfolio by keeping stocks, cryptocurrencies, and precious metals in the basket. For traders, it is recommended to use stop losses in every trade and not rely entirely on historical movements.