What The Fed’s November Rate Hike Means For Investors

Key takeaways

• The U.S. central bank is preparing to release November’s Fed rate hike decision by Wednesday
• Investors and economists widely expect the Fed to hike interest rates by 0.75% in November
• The Fed is also expected to reveal insights regarding future rate hike plans for late 2022 and early 2023

This week, the U.S. central bank is preparing to release its widely-anticipated November Fed rate hike decision. Investors and economists widely expect the Federal Reserve to hike rates 75 basis points (0.75%) by Wednesday.

If the Fed follows through, it will mark the sixth rate hike to the federal funds rate this year. The funds rate has risen 3 percentage points since the Fed’s March meeting, bringing the target range to 3-3.25%.

Markets have spent the last few sessions jostling ahead of this week’s meetings, which begin Tuesday and conclude Wednesday. 2- and 10-year Treasury yields bumped up 7 and 5 points, respectively, on Monday.

Meanwhile, the S&P 500 nudged down 0.75%, while the Nasdaq dipped 1%. The Dow slipped just 0.4%. But in the last five days, the Dow has gained 4%, while the S&P 500 has reclaimed 1.9%. The Nasdaq is down about 0.1% in the same period.

Rate hikes refresher

You’ve likely heard about interest rates and inflation a hundred times this year, so we’ll keep this brief.

The November Fed rate hike is another in a chain of rate hikes designed to halt spiking inflation, which hit 8.2% in September.

Inflation occurs when prices for goods and services rise over time. While some inflation pushes economies along, high, sustained inflation eats into budgets, business profits and investor portfolios. Left too long, a high-inflation economy may fall into recession.

To combat these impacts, central banks like the U.S. Federal Reserve raise interest rates to – hopefully – curb inflation.

When the Fed hikes interest rates, it’s actually only increasing one: the federal funds rate. By raising the rate that banks charge each other for overnight loans, the Fed ensures these hikes trickle to customers. As a result, the cost of business and consumer borrowing rises, which in turn slows business and consumer spending.

The inflation we’ve seen in 2022 is slightly unusual in that it was kicked off thanks to Covid-19-related supply chain issues. Unfortunately, that means that the Fed’s main tool to fight inflation – namely: rate hikes – doesn’t solve the problem at its source.

Still, it doesn’t look like that will stop the Fed in November.

Predictions ahead of November’s Fed rate hike

Since September, speculation has run rampant regarding the Fed’s November rate hike decision.

A Reuters poll published on October 25 found that 86 out of 90 economists expect a rate hike of 0.75% this week, bringing the target range to 3.75-4.0%. Only 4 respondents expect a 0.50% move instead.

The poll also found that a “majority” of economists see a 0.50% rate hike following in December. More than that, economists now see a 65% probability of a recession occurring within one year.

Despite this risk, polled economists largely agreed that the central bank shouldn’t pause rate hikes until inflation falls to half of its current level, or around 4.4%.

Market observers agree that a 0.75% rate hike seems likely in November.

Said Danielle DiMartino Booth, chief strategist at Quill Intelligence, “A 75-basis point rate hike on Wednesday should be fully expected, as the unemployment rate is still at a 50-year low and there is nothing to suggest that Powell will soften his stance on fighting inflation. The stock market surge since the last Fed meeting in mid-September only strengthens Powell’s case for continuing to tighten financial conditions.”

Goldman Sachs’ two cents

It’s no secret that Goldman Sachs economists expected the Fed to hike interest rates 0.75% on Wednesday. But the bank forecast even further, predicting a 0.50% hike in December, a 0.25% hike in February, and now, an additional 0.25% in March.

Analysts offered three justifications for their forecast:

1. Inflation is likely to remain “uncomfortably high,” making small, incremental rate hikes “the path of least resistance”
2. Rate hikes could help “keep the economy on a below-potential growth path” as real incomes begin to grow again
3. The Fed wants to avoid easing up too quickly and allowing inflation to spike harder down the road

All told, Goldman Sachs expects the federal funds rate to peak at 4.75-5.0% by spring 2023.

The Fed’s position

According to statements made by Federal Reserve Chair Jerome Powell back in September, Goldman Sachs analysts may be onto something.

“Restoring price stability while achieving [an increase] in unemployment and a soft landing would be very challenging,” Powell said. “[But] we think that a failure to restore price stability would mean far greater pain later on.”

A few days later, Atlanta Fed President Raphael Bostic noted that stubborn and ongoing inflation would likely prompt the Fed to institute “moderately restrictive” interest reaching as high as 4.50% this year. Said Bostic in a conference call, “Inflation is still high… and it is not moving with enough speed back down to our 2% target.”

At the time, Bostic predicted a 0.75% rate hike in November, followed by a 0.50% hike in December.

However, he also mentioned that he’d seen signs of slowing demand in the U.S. – namely, a cooling housing market and a “growing chorus” of company executives finding it easier to hire workers.

But, on October 5, Bostic publicly noted that the U.S. economy is “still decidedly in the inflationary woods.”

When will rate hikes slow?

A 0.75% rate hike seems to be the consensus for November’s Fed meeting. But eventually, these rate hikes will have to slow – right?

That’s the basis for some of the buzz around this week’s Fed policy meeting. Investors, analysts and economists are all holding their breath to see how hawkish the Fed remains on the topic of inflation.

Quincy Krosby, chief global strategist for LPL Financial, said about November’s meeting that “Wednesday’s message will be crucial for market expectations…. Chairman Powell will need to convince traders and investors alike that the Fed is still resolutely determined to curtail inflation, but that it can be accomplished with a steady dose of lower rates.”

And last week, U.S. Senate Banking Committee Chair Sherrod Brown wrote a letter to the Fed’s Board of Governors, cautioning them to consider the impact of high interest rates on job security.

“It is your job to combat inflation, but…you must not lose sight of your responsibility to ensure that we have full employment,” he wrote. “We must avoid having our short-term advances and strong labor market overwhelmed by the consequences of aggressive monetary actions to decrease inflation, especially when the Fed’s actions do not address its main drivers.”

The Fed’s take

Whether this week’s meeting will address these crucial concerns remains to be seen. However, Chair Powell’s past statements have indicated that he considers beating inflation to be the only way to ensure long-term market strength.

That said, he also indicated during September’s policy meeting what environment could spur slower rate hikes.

“Over coming months, we will be looking for compelling evidence that inflation is moving down, consistent with inflation returning to 2 percent,” he said. “We anticipate that ongoing increases in the target range for the federal funds rate will be appropriate.”

Fed Vice Chair Lael Brainard took a more hardline stance, stating: “We are in this for as long as it takes to get inflation down. So far, we have expeditiously raised the policy rate to the peak of the previous cycle, and the policy rate will need to rise further.”

Atlanta Fed President Bostic offered a more specific take. “I would expect growth to be below trend, we would start to see demand for a wider range of products start to soften, and we would start to see labor markets start to be more rationalized,” he said. Alongside fewer job openings and slower wage growth, these would be a sign that “we should contemplate stopping and holding at that level.”

Already, some of these factors have begun to surface. Supply chain snarls are starting to ease as consumers lower unnecessary spending amid high prices and interest rates. Retailers have begun lowering some prices to clear excess inventories. And wage growth has flattened somewhat, which could ease inflationary pressures.

But until Wednesday, we won’t know if these small steps are enough to get the Fed to back off.

What does this mean for investors?

Currently, the consensus appears to be that the Fed’s jumbo 0.75% rate hikes will continue in November, with a slightly smaller rate hike following December. For consumers, that means that interest rates will continue rising on credit cards, mortgages, auto loans and more.

For investors and savers, these rate hikes bring admittedly mixed news.

On one hand, higher interest rates spell greater earnings potential on bonds, certificates of deposit (CDs), money market accounts and of course, savings accounts. However, it’s unlikely that these advances will make up for September’s 8.2% inflation reading, let alone beat it.

On a more negative note, interest rates continue to bash securities from both angles. Higher rates lead to less liquidity in both the crypto and stock markets as borrowing rates increase and investors move into more conservative investments.

Additionally, as inflation and interest rates band together to increase business costs and decrease consumer spending, business profits decline, tamping down stock prices.

Unfortunately for investors, it could be a while before battered portfolios recover from 2022’s inflation-interest double whammy.

Don’t let November’s Fed rate hike decision get you down

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