The stock market is buzzing with Fed excitement after the central bank held interest rates steady and hinted at potential rate cuts in 2023. Investors are seizing this opportunity to re-enter the market, viewing it as a good time for business investing.
The Federal Reserve's decision, while not beneficial for stocks, has sparked renewed interest in the market. The pause in rate hikes could potentially extend the current rally, with some investors viewing it as a turning point for business investing.
Many investors are optimistic about a potential pause in rate hikes, viewing it as a good opportunity for business investing. The Fed's decision to hold interest rates steady at a target range of 4.25 to 4.5 percent has sent shockwaves through both the stock and bond markets.
Borrowers with fixed-rate mortgages or floating-rate debt will not see any relief, while new borrowers may face higher interest rates. The average interest rate on personal loans remains high at 12.46 percent, and credit card rates are still over 20 percent. Credit cardholders with debt are advised to aggressively pay it down using balance transfer offers to minimize their debt burden.
Stock investors are not thrilled with the decision to hold rates steady, as low rates usually make stocks more attractive investments. Elevated inflation and the pause in rate cuts diminish the appeal of stocks, particularly those with stretched valuations.
Higher interest rates have negatively impacted bond prices, especially for longer-term bonds. Inflation erodes the buying power of future bond payments, causing yields to rise and bond prices to fall.
Despite the pause in adjusting rates, banks will likely keep savings, money market, and CD rates stable for now. Savers should actively seek out top-yielding offers from online banks or credit unions to maximize their earnings.
The housing market remains influenced by mortgage rates tied to Treasury yields, with 30-year mortgage rates still elevated. The Fed's rate hikes have slowed the housing market, leading to a drop in home sales but record-high home prices.
The Fed's decision does not help the U.S. federal government's short-term borrowing costs as it rolls over debt and borrows new money at higher interest rates. The government's total borrowing costs have been rising as older debts are rolled over at today's higher interest rates.
Almost 60% of traders are betting on at least two quarter-point cuts in 2025, while about 40% predict either a single reduction or no cut at all. The Fed's "dot plot" forecast indicates two 2025 rate cuts of a quarter-point each.
Sources:
[1] "Fed Decision Holding Rates Steady Could Mean Volatility in Both Stocks and Bonds," Investopedia, October 31, 2022, .
[2] "Federal Reserve Holds Rates Steady as Investors Bet on 2025 Rate Cuts," CNBC, December 14, 2022, .
[3] "Fed Decision: What It Means for Homebuyers, Sellers, and Mortgage Rates," CNBC, December 15, 2022, .
[4] "Fed Pauses Rate Hikes, Inflation Remains Elevated," Reuters, December 14, 2022, .
[5] "Fed Decision Takes Stocks Higher As Rate Hike Pause Sparks Rally," Yahoo Finance, December 15, 2022, .
