Markets Fall Following Fed’s Latest Rate Hike

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What's Happening Today

Were you hoping that the Federal Reserve would slow down its aggressive pace of rate hikes? Well think again. Yesterday the Fed increased interest rates by another 75 basis points as expected in its fight against inflation, which remains persistently high. In a press conference with reporters, Fed Chair Jerome Powell said that it was "premature" to think about pausing rate hikes, and that the central bank would keep going "until the job is done."

Stocks are reacting to the news, and markets are falling as investors realize that the pain train is going to keep chugging along, hitting future corporate earnings. Tech companies could feel it the most, so this might be a good time to make sure that your portfolio is a little more diversified. If you're heavily invested in the tech sector, your investments could continue to feel the sting.

Even if you aren't looking too closely at your investments, you might still be impacted by higher interest rates. Rising interest rates are a tool used to slow down the economy, so these rate hikes should bring higher unemployment, and possibly a recession. If you want to buy a house, or a car, or get a loan from the bank, it will cost you more money. Your credit card debt will also become more expensive as credit card interest rates also rise.

Tomorrow, we'll see how rate hikes have impacted the jobs market so far with the Labor Department's report on how many jobs were added last month. The labor market has been resilient, but that could change. We've gotten an early indication today on how the labor market is doing: Jobless claims, or people filing for unemployment for the first time, decreased to 217,000 in the latest week, holding close to historically low levels. That also doesn't bode well for us, as a strong jobs market means the economy can handle even more rate hikes.

- Kristin

Editors' Picks

Fed Squeezes Economy Harder With 4th Steep Rate Hike (The Balance)

Consumers' Pandemic Cash Stash Could Dry Up in 14 Months (The Balance)

US Jobless Claims Hold Near Historic Low Despite Cooling Economy (Bloomberg)

Labor Costs Show Slower Rise, While Trade Deficit Widens and Jobless Claims Nudge Lower (CNBC)

Fed's Hard Line on Interest Rates Fuels Bond Rout (The Wall Street Journal)

Why Diversification Is Important to Your Portfolio (The Balance)

10 Common Stock Investing Mistakes To Avoid (The Balance)

Term of the Day

Diversification

A diversified portfolio is a collection of investments in various assets that seeks to earn the highest plausible return while reducing likely risks. A typical diversified portfolio has a mixture of stocks, fixed income, and commodities.

Diversification works because these assets might react differently to the same economic event. In a diversified portfolio, the assets don't correlate with each other and when the value of one rises, the value of another may fall. The mixture can lower overall risk because no matter what the economy does, some asset classes will benefit. That can offset losses in the other assets.

Risk is also reduced because it's rare that the entire portfolio would be wiped out by any single event. A diversified portfolio is your best defense against a financial crisis.

Off the Charts

As widely anticipated, the Fed once again raised its benchmark interest rate 75 basis points yesterday, bringing the federal funds rate to a range of 3.75%-4%.