US surprise rate hike and market tanks - My thoughts so far

Yesterday, the market was expecting Fed to hold off on increasing interest rate to help with the market.

However, Powell came out and decided to increase the interest rate by 25 basis point. This surprised many investors (myself included) and the market dropped within one day.

Here's what I think will happen so far:

US provides back stop liquidity to all banks ($2T). This ensures deposits remain available. Stop big banks from going bankrupt - Done
US continues to increase interest rate by another 0.25 (as mentioned by Powell) - Terminal rate is near 5.25%
Borrowers (e.g. homeowners, and businesses with leverage) continue to hurt
Companies with negative profit/cashflow will hurt the most (Technology)
Companies with high leverage will hurt the most (Real Estate)
Higher cost of capital lower growth which induces layoff to spike unemployment

While Powell is stubbornly trying to get inflation down to 2%, the inflation index will be near 2-3% in the second half of 2023 anyways.

Thus, Powell's overshooting the interest rate target is creating unnecessary pain for the investing world.

With such high cost of capital, my friends working at the bank and deal environment noted low volume of business. This means businesses are unable to get the financing they need to continue to grow, which is contracting the economy perhaps too much (more unemployment and less investing gains).

Initially, I thought March may end up being a slightly positive month but now it is looking like a breakeven month for long term investing (or a slight loss)

As for the market reaction, I don't think the market has fully digested the interest rate hike yet. We will see what happens on Thursday and Friday.

Cheers,

Eric Seto, CPA CIM

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