According to CNBC, big stocks suffered huge losses as the market plummeted on Friday. Some economists believe the country must experience a recession before inflation dies down.
The numbers: The Dow Jones Industrial Average fell to a record low this year, shedding 486.27 points at 29,590.41.
- The S&P 500 fell 1.72% to 3,693.23 and the Nasdaq Composite fell 1.8% to 10,867.93.
- The US dollar also hit a 20-year record high on Friday, according to Reuters.
Rate hike: On Wednesday, the US Federal Reserve raised interest rates by 3% to 3.25%. When interest rates rise, stocks tend to fall.
- The rate hike was carried out in an attempt to curb high rates of inflation leading to “supply and demand imbalances related to the pandemic, higher food and energy prices and broader price pressures,” the Federal Reserve said in a statement.
Why do stocks fall when interest rates rise? In short, Forbes notes that “when interest rates rise, stocks tend to lose value because of future earnings.” That means companies are less likely to borrow when interest rates are high, potentially leading to slower profits.
- Forbes goes on to explain that some economists believe a hike in federal interest rates will weigh on the economy for a moment but eventually lead to a boom. On the other hand, some believe that cutting interest rates will push the economy further into recession.
Outlook: Some market experts believe that the economy must brace itself for a recession in order to curb inflation.
- According to MarketWatch, the Fed has indicated that it intends to continue raising interest rates into next year and not stop until inflation falls. In other words, things are likely to get tight financially before things can get any better.
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