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For anyone interested in the United States financial system, the Federal Reserve is the place to look. The Federal Reserve System (Fed) is an organization of 12 different banks that acts as a "lender of last resort" to ensure the stability of the banking and financial system. With an eye on the long run, the Federal Reserve seeks to maintain a PCE index and CPI (consumer price index) inflation rate of 2% per year. The Fed's goal is to maintain a sustainable full employment rate in the economy.

Since the market has priced in a rate hike of 75 basis points, any unexpected action by the Fed might cause panic. If implemented, a rate rise of 75 basis points would be the third increase of this size in as many years.

The stock market would likely react negatively to expectations of increasing interest rates. The buying power of currency declines in an economy struggling with excessive inflation. When consumer spending decreases, businesses see a decline in their profits. Therefore, when the pace of profit growth slows, investors begin assigning smaller multiples to businesses.

The recent effect of the Fed decision

The US Federal Reserve is likely to maintain its strong stance toward taming inflation after August inflation figures were higher than anticipated. In addition, investors in the US stock market face danger from the prospect of interest rates increasing. The stock market, according to billionaire investor Ray Dalio, might drop by 20% if interest rates climb to 4.5 percent. Given the effect of rate rises on stifling growth, several analysts and economists have already predicted a US recession in 2023.

When investors learned that the Federal Reserve will be raising interest rates again on Wednesday, the sell-off on Wall Street accelerated, and stocks fell sharply on Tuesday.

At its final tally of 30,706.23, the Dow Jones Industrial Average was down 313.45 points, or 1.01%. The Nasdaq Composite dropped 0.95 percent to 11,425.05, while the S&P 500 fell 1.13 percent to 3,855.93.

On Tuesday, the Federal Open Market Committee started a two-day policy meeting during which they are likely to announce a 0.75 percentage point rate rise on Wednesday.

The yield on the 10-year U.S. Treasury note rose beyond the round 3.5% mark as rates overall continued to fall. The two-year rate is quite close to 4% and may cross that threshold before tomorrow's Fed event. The current increase in rates may be attributed to hot inflation statistics from Japan and Germany overnight.

In contrast to the roughly 1% decline seen across European bourses, overnight gains were seen in Asia.

Yesterday's increase in price for a barrel of West Texas Intermediate crude oil has been erased, and the commodity is now down over 2% to $83.34.

The Fed is widely anticipated to take a more hawkish stance than it did at the June meeting, when it last released its estimates. A more aggressive attitude from the Fed might harm the economy, perhaps leading to a recession in the first half of 2023.

More things to know

The stock market has fallen in recent weeks as investors anticipate higher interest rates until inflation cools in response to statements from Federal Reserve Chair Jerome Powell and an unexpectedly strong consumer price index data for August.

The yield on the 2-year Treasury note climbed as high as 3.99% as markets plummeted, marking a new high not seen since 2007. Ten-year Treasury yields momentarily above 3.6 percent, a level not seen since 2011.

According to Jack Ablin of Cresset Capital, the rise in the 10-year yield was a factor in Tuesday's turbulence on the stock markets.

Following a bull market rise that began in April 2020, the US stock market crashes in 2022. Several of the most valuable U.S. equities have fallen in price as a result of the Fed's 225 basis point rate rise thus far. Since January of 2022, the S&P 500 and Nasdaq 100 have both fallen by more than 20%. It's unclear if the markets will continue falling or whether they'll pause for a little before making a turnaround.

Robert Johnson, chairman and CEO of Economic Index Associates, concurs, noting that market gains are often reduced in "restrictive," or rising-interest-rate, settings. According to Johnson, the average yearly real return for equities during a 55-year period was 13.8% during expansive eras and just 1.7% during limited ones.

Johnson, though, adds that certain stock market segments are more resistant to rising interest rates. In light of increasing interest rates, he advises investors to adopt a "sector rotation strategy," in which they shift their investments from one industry to another. When rates increase, investors may find success betting on stocks in certain industries, including those dealing with consumer goods, energy, finance, and utilities.

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