There’s a saying on Wall Street referring to the stock market that “all correlations go to one in a crisis.” Perhaps more accurately, all correlations go to one when a single governing body determines interest rates for the entire economy.
Interest rates are the price of money. Virtually all public companies utilize debt to some degree. When the cost of this debt increases, the stock price of each company must decrease.
The Federal Open Market Committee (FOMC) is a board made up of 12 economists who decide how to adjust the interbank lending rate called the federal funds rate (FFR). For roughly 40 years, this rate has been on a secular decline, cheapening the cost of money. All major indices have experienced exceptional growth during this same period (with occasional hiccups due to attempted tightenings). Now, as the FOMC has begun its most recent tightening, it’s no surprise that markets have declined precipitously since from their 2021 highs.
The stock market is not the only victim of rising interest rates. As our economy, small and large and public and private businesses, have become accustomed to cheap debt, the rapid rise of rates is taking its toll. Unemployment claims are beginning to rise, mortgage applications have fallen off a cliff, and many public companies are announcing layoffs. The FOMC is intentionally inflicting pain on the economy to combat inflation many would argue it caused in the first place.
When inflation turned out to not be transitory, millions of working class people suffered the consequences at the grocery store and gas pump. Now, the same economists who were mistaken on inflation are rapidly increasing the cost of operating a business and reassuring us it will not spark recession.
