Jan 21, 2023: How different industries are impacted by the Fed’s interest rate decisions?Chairman Powell got his wish this week when Google’s parent company, Alphabet, announced plans to cut 12,000 employees, just days after software giant Microsoft announced plans to cut 10,000 employees, and Amazon began laying off 18,000. He warned that pain was coming and it has arrived for thousands of people whose lives have been upended. Not long ago, the government spent trillions of dollars on the PPP program to pay employers to retain employees, and now the people in charge are determined to cause a million people to lose their jobs.
The Federal Reserve is reversing its decade old policy of keeping interest rates low and increasing the money supply through quantitative easing. This process involved the central bank buying government bonds and other securities from banks, with the goal of increasing the money supply and lowering interest rates. This resulted in the Federal Reserve’s balance sheet expanding from $1 trillion to $8.5 trillion as a result of this quantitative easing. This resulted in a misallocation of capital and the Fed did nothing at the time to correct it. In 2020, there was an artificial boost created by pandemic-era decisions. For instance, in a brief moment in 2021, the video-conferencing company Zoom had a higher market cap than oil giant ExxonMobil, and now Exxon is worth more than nineteen times Zoom. Last year, the technology bubble burst and capital now looks less misallocated.
The Federal Reserve is currently working to lower inflation and is expected to cut interest rates as soon as it accomplishes this goal. As a result, many traders believe that there will be a market rally and that this will cause inflation to return. This is already evident in the recent increase in high-risk technology stocks and meme stocks, as well as the jump in the price of cryptocurrencies like Bitcoin. Despite the Fed’s current focus on raising rates, investors are continuing to invest in these stocks anticipating that interest rates will have to be cut if the labor market weakens. The yield curve is now the most inverted it has been since 1981, signaling a potential job recession later this year. However, investors are buying on any sign weakness with the expectation that earnings will rebound even in a recession.
This may seem counterintuitive, but there is a good explanation for why stocks do better when people lose their jobs. One reason is that when a company announces layoffs, it often signals to investors that the company is taking steps to cut costs and improve profitability. This can boost the stock price overnight, as investors anticipate increased earnings and higher returns on their investments. Another reason is that the tech industry is not large enough to cause a meaningful labor market slowdown on its own. The technology sector, while important and rapidly growing, is not as significant to the labor market compared to other sectors such as service and manufacturing. The technology sector is known for its high turnover rate, as the industry is constantly evolving and new technologies are frequently developed, which means that the demand for certain skills can change rapidly. This means that while the technology sector may be creating jobs at a fast pace, it may also be losing jobs just as quickly, which limits its overall impact on the labor market. The Fed’s actions will slow the economy, but companies are adjusting to this new environment, and so far, the stock market has not crashed as many had feared.
The shape of the economy is a “K,” meaning that while some people will do very well, others will be forced to make difficult decisions. People who own assets such as real estate, stocks, and bonds tend to do better during high inflation. People who have savings in cash or bonds, on the other hand, may see their purchasing power decrease. The Fed’s actions will also affect different sectors of the economy in different ways. For example, as interest rates rise, the housing market may slow down, but the financial sector will benefit. Banks make more money when interest rates increase because they are able to charge higher interest rates on loans. The interest rate they pay on deposits is generally lower than the rate they charge on loans, which means that the spread between the two increases and their profit margin increases as well. This was the case when banks reported quarterly earnings last week.
The Fed’s actions to unwind its ultralow interest rate policy and shrink the balance sheet will continue to create job losses and a slowdown in the economy. The technology sector, in particular, has been hit hard by the job recession, but it is not likely to cause a meaningful labor market slowdown on its own. The stock market will continue to experience volatility as investors adjust to the changes. The Federal Reserve’s actions are affecting various industries in different ways, making this economic downturn unique and unlike previous slowdowns.
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Chairman Powell got his wish this week when Google’s parent company, Alphabet, announced plans to cut 12,000 employees, just days after software giant Microsoft announced plans to cut 10,000 employees, and Amazon began laying off 18,000. He warned that pain was coming and it has arrived for thousands of people whose lives have been upended. Not long ago, the government spent trillions of dollars on the PPP program to pay employers to retain employees, and now the people in charge are determined to cause a million people to lose their jobs.
The Federal Reserve is reversing its decade old policy of keeping interest rates low and increasing the money supply through quantitative easing. This process involved the central bank buying government bonds and other securities from banks, with the goal of increasing the money supply and lowering interest rates. This resulted in the Federal Reserve’s balance sheet expanding from $1 trillion to $8.5 trillion as a result of this quantitative easing. This resulted in a misallocation of capital and the Fed did nothing at the time to correct it. In 2020, there was an artificial boost created by pandemic-era decisions. For instance, in a brief moment in 2021, the video-conferencing company Zoom had a higher market cap than oil giant ExxonMobil, and now Exxon is worth more than nineteen times Zoom. Last year, the technology bubble burst and capital now looks less misallocated.
The Federal Reserve is currently working to lower inflation and is expected to cut interest rates as soon as it accomplishes this goal. As a result, many traders believe that there will be a market rally and that this will cause inflation to return. This is already evident in the recent increase in high-risk technology stocks and meme stocks, as well as the jump in the price of cryptocurrencies like Bitcoin. Despite the Fed’s current focus on raising rates, investors are continuing to invest in these stocks anticipating that interest rates will have to be cut if the labor market weakens. The yield curve is now the most inverted it has been since 1981, signaling a potential job recession later this year. However, investors are buying on any sign weakness with the expectation that earnings will rebound even in a recession.
This may seem counterintuitive, but there is a good explanation for why stocks do better when people lose their jobs. One reason is that when a company announces layoffs, it often signals to investors that the company is taking steps to cut costs and improve profitability. This can boost the stock price overnight, as investors anticipate increased earnings and higher returns on their investments. Another reason is that the tech industry is not large enough to cause a meaningful labor market slowdown on its own. The technology sector, while important and rapidly growing, is not as significant to the labor market compared to other sectors such as service and manufacturing. The technology sector is known for its high turnover rate, as the industry is constantly evolving and new technologies are frequently developed, which means that the demand for certain skills can change rapidly. This means that while the technology sector may be creating jobs at a fast pace, it may also be losing jobs just as quickly, which limits its overall impact on the labor market. The Fed’s actions will slow the economy, but companies are adjusting to this new environment, and so far, the stock market has not crashed as many had feared.
The shape of the economy is a “K,” meaning that while some people will do very well, others will be forced to make difficult decisions. People who own assets such as real estate, stocks, and bonds tend to do better during high inflation. People who have savings in cash or bonds, on the other hand, may see their purchasing power decrease. The Fed’s actions will also affect different sectors of the economy in different ways. For example, as interest rates rise, the housing market may slow down, but the financial sector will benefit. Banks make more money when interest rates increase because they are able to charge higher interest rates on loans. The interest rate they pay on deposits is generally lower than the rate they charge on loans, which means that the spread between the two increases and their profit margin increases as well. This was the case when banks reported quarterly earnings last week.
The Fed’s actions to unwind its ultralow interest rate policy and shrink the balance sheet will continue to create job losses and a slowdown in the economy. The technology sector, in particular, has been hit hard by the job recession, but it is not likely to cause a meaningful labor market slowdown on its own. The stock market will continue to experience volatility as investors adjust to the changes. The Federal Reserve’s actions are affecting various industries in different ways, making this economic downturn unique and unlike previous slowdowns.