The fixation in the stock market on interest rates set by the Federal Reserve is intense. Volatility in 2H22 is attributable to this fixation.
That the Federal Reserve has outsize impact is incredible for a non elected but politically appointed agency. So much print is expended on analyzing and writing about Fed moves.
Mortgage rates have increased from 3% to 7% in a year. That’s impactful. Any one wanting to take a mortgage will think hard about paying 7%. That cuts down demand for homes. Fed can influence the economy that way. Is that fair for people? A few years ago one could take a mortgage for just 2.5%. That’s not fair for recent entrants to home buying for no fault of theirs.
The Fed is also responsible for maintaining a healthy employment rate. That means they can’t let employment rate be too high. If more people were employed, they would have more money to spend and demand would increase. That means Fed has to keep employment just right even if it means they want to force people to lose jobs. That’s not humane, is it?
As you may have guessed the other role of Fed is to keep inflation stable. They have decided that 2% annual inflation rate is tolerable for people. Anything beyond that is unstable for folks. Wild changes in prices for goods and services results in less savings for people even if they are making more money. So inflation is super important to manage. It has a devious impact for asset building.
It’s important to understand the role of Fed in influencing the economy. That can help with timing of asset accumulation.