Jerome Powell just reversed the Federal Reserve’s position on interest rates, and this caused the stock market to crash. The stock market crash was caused by Powell’s reversal on Fed rate hikes during a warning that he gave while speaking at the IMF today. After the FOMC meeting, Powell seemed dovish, but today he was quite hawkish. The Federal funds rate is expected to increase at the next Federal Reserve board meeting, and this sent interest rates on bonds skyrocketing, which in turn caused a significant stock market crash today. This and the rest of the stock market news today you need to know about.
Federal Chairman Jerome Powell just gave a shocking warning to investors that caused the stock market to crash. What Jerome Powell said at the IMF today was shocking. It was a reversal of the Fed’s policy on rate hikes, no longer pausing or even thinking about cutting rates, but actually now thinking about raising rates further. The stock market did not like this. And you need to understand what Jerome Powell said, because this has a significant impact not only on your investments, but also on your personal finances, and possibly even your job security. I’m Stock Curry. I’m a former Merrill Lynch and Morgan Stanley investment banker. I’ve been trading for over 25 years, and what the Federal Reserve is doing right now is really bad news for the stock market.
Now, stocks initially started out the day rising. They were on track for the longest winning streak in years. Unfortunately, they started to fall after some jitters came up from the Treasury Department, right before Jerome Powell started speaking. There was a weak Treasury auction. And what this means is there wasn’t as much demand for bonds as investors had originally expected. Now, when there’s low demand for bonds, this causes prices to go down in order to meet that lower demand. And when bond prices go down, this causes yields to go up. And when yields go up, that means interest rates go up. And when interest rates go up, it makes it more expensive for companies to borrow, and turn stocks went down because this is actually bad news for stocks. So just keep in mind that as bond prices go down, this causes stocks to go down because it causes interest rates to go up.
Now initially when news came out of that really weak demand from the auction today, stocks fell. But then they pretty quickly recovered. Stocks were still really wanting to be bullish. But once Jerome Powell started speaking at the IMF, that is when everything fell apart and stocks just absolutely crashed. Hours ago, Powell said the Fed is not confident it has done enough to bring down inflation. Chairman Powell issued a warning to investors who were too giddy on the prospect of rate cuts. Next year, the fed will be true to its mandate and hike further. Bond traders were pricing in not only the Fed no longer raising rates, they were actually pricing in the Fed cutting rates. And Jerome Powell today made it very clear not only is the Fed not going to cut rates, they’re not even looking at pausing anymore. In fact, the Federal Reserve is now looking at raising rates once again in order to get inflation down to 2%. And the stock market and bond market did not like that one bit.
The S&P 500 snapped its eight day winning streak as the Dow closed down over 200 points. And as Jerome Powell continues to be very hawkish and indicate that the Federal Reserve will continue to raise interest rates, this is going to continue to put downward pressure on the stock market. If you watched my last video, I talked about how it was really an epic short squeeze that caused the stock market to rally over the past two weeks. But very often those epic short squeezes get a little bit overdone. Stocks go up too much, and then they have to kind of come back down to reality. And that’s really what we’re seeing here today, is that there was just too much hype, there was too much buying. And now stocks are settling back into the reality that the Fed is not only not going to cut, they’re actually might raise rates.
Now, the reason Jerome Powell feels confident that he can continue to raise interest rates and push the stock market down lower is because the economy remains quite strong. And the main reason the economy remains strong is because consumer spending remains strong. But if you look at a lot of the leading indicators, it indicates the economy is actually slowing down and has been for over a year. So if the economy is really slowing down, and if it’s really that bad, then why is GDP continuing to go up, and why do consumers continue to spend?
Well, there’s five reasons why Americans just can’t stop spending. The first is that jobs are everywhere. The labor market remains strong, and even though we did see a slowdown in new job growth in last month’s report, the fact is the labor market is still growing, there are still more jobs being added, and the labor market remains strong. Unemployment remains extremely low, and because of that, Americans feel confident. They can continue to spend because they feel confident in their job security. They’re not worried about losing their jobs right now.
The second reason Americans continue to spend is they have a lot of money built up in their house. Americans are using Home Equity Lines of Credit (HELOCs) and other ways of pulling money out of their house in order to remodel their house, improve their homes, and go on vacations and just do the things that they want to do. In other words, Americans are going into debt using their home equity in order to continue to spend.
The third reason Americans continue to spend is that they have a lot of savings built up from 2020 and 2021. In 2020 and 2021, as the COVID pandemic was at its full fledged heights, a lot of Americans were sitting at home. They couldn’t shop. They couldn’t go anywhere. They were just saving up money. Now they’re spending all of that savings. And that’s one of the reasons why spending has continued, even as inflation continues to go up.
The fourth reason Americans continue to spend is because of a buy now belief. As inflation continues to rise and go higher and higher and higher, the cost of goods continues to go higher and higher as well. And a lot of Americans believe it’s best to buy now before prices go higher in the future. So Americans are rushing to make all of their major purchases right now before prices go up.
And the fifth reason Americans continue to spend is just a good outlook on life. Because of a strong labor market and because of extra money in savings, because of all of the reasons I just stated, Americans generally have a pretty good outlook on life, and when Americans feel good, they tend to spend.
So there you have it. A strong labor market, resilient savings, stockpiles, and rising values of homes have consumers feeling good and willing to spend. In fact, consumers have spent so much that the strong spending caused economists to be wrong about a 2023 recession. But the warning that you have to pay attention to is that just because things are good now, does not mean that things are going to be good in the future.
There are signs that Americans elevated spending habits aren’t sustainable. Some 60% of Americans said they have fallen behind on emergency savings this year. And long term interest rates, which make it more expensive to buy homes and cars and borrow money on credit cards, may only just now be reaching the point where they will slow Americans spending. There are also other signs that Americans have perhaps spent too much and now can’t afford to pay their bills. The average credit card balance topped $6,000, which is a ten year high, and credit card delinquencies are rising. Credit card debt in the US has topped over $1 trillion this year, and persistent inflation has put many households under financial pressure as more cardholders are carrying debt from month to month, or falling behind on payments.
Credit card delinquency rates rose across the board, so Americans across the board are starting to fall behind, no matter what their earning income level is. Studies have shown that even Americans making over $200,000 a year are struggling financially to be able to pay all of their bills. And Americans of all income groups are starting to fall behind on their credit card payments.
Unfortunately, there’s more pain ahead in the labor markets as Fintechs look to cut costs and do more layoffs. And as more and more companies continue to do layoffs, this is going to continue to put downward pressure on the labor market. Eventually, this is going to cause there to be more workers than there are available jobs. And eventually this is going to cause the unemployment rate to rise. We haven’t quite seen it yet, but it’s definitely coming in the future. Most economists expect the unemployment rate to start rising next year in 2024.
There’s also a major warning on the horizon for the US economy, something that’s even bigger than what caused the 2008 financial crisis, and that is the commercial real estate sector. Unfortunately, the collapse of Signature Bank means that their loans are now going to be sold, and commercial property values are expected to drop anywhere from 15% to 40%. A drop like this is enough to cause a major economic crisis here in the United States. Keep in mind that when housing prices fell 20% in 2008, it caused the Great Financial Crisis. Now we’re seeing commercial real estate falling by as much as 40% – twice as bad as it was in 2008 – and all of the banks that are currently holding those commercial real estate loans are about to be deeply underwater, and the same kind of foreclosures that we saw in 2008 are about to happen again, this time in the commercial market. And this is about to be really bad news for the US economy.