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Can Markets Correct Themselves?

by Financial Design Studio, Inc. / October 26, 2018

Much of the current market pullback over the past few weeks has been instigated by talks of higher interest rates.  Fear that higher interest rates will push us into a recession has kept investors concerned. There are analysts who oppose the Fed continuing to raise interest rates when it could hurt the economy by raising rates too fast.  Let’s look at some charts to analyze historical rates, economic productivity, and market performance.

Financial Design Studio Chart

Take a look at the above chart that shows the historical level for the Fed Funds Rate.  When the 2007-2008 Financial Crisis hit the economy the Fed lowered rates in order to stimulate the economy by decreasing the cost to borrow funds.  This helped both businesses and individuals alike when they wanted to borrow money to buy a home or finance a business project.

Some analysts argue that if the Fed sets a rate, assume around 5%, then the market will self-correct when something like the Financial Crisis of 2007-08 happens.  If the rate seems too high to borrowers then they won’t borrow. If the rate seems affordable then they will assume the cost to borrow given the benefit they’ll receive in doing so.

This helps to explain why you hear many voices in the media calling for the Fed to slow or continue the current rate hikes.  The above graph however helps us to see where the historical level has been and where we are today.

This rate affects you, if you borrow money.  With rates expected to move higher you really have to consider the rate being charged to you in order to borrow funds.  Whether this is through a home equity line of credit, mortgage, credit card, or even simply refinancing your current debt.  Stay focused on your long term investment plan. Rates will continue to fluctuate in the future.

Wondering how this affects your investments? Schedule a call with Michelle and Steve to discuss your portfolio today.

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Financial Design Studio, Inc.

We are financial advisors in Deer Park and Barrington, IL. A team with a passion for helping others