I understand why increasing interest rates can negatively affect the economy, but why would the Feds raise the rate because of the positive jobs report?
I always assumed that more people employed means more discretionary spending leading to more corporate profits.
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The Feds have what is known as a “dual mandate” – it has two things it is tasked with accomplishing in order to regulate the economy. These two things are:
1. Maximizing employment
2. Keeping inflation at 2%
The US has been experiencing inflation far exceeding that 2% target for the past few years. In response, the Fed has raised interest rates, with the intention that these increases will make the money supply more limited, and therefore, bring inflation back down to their target. Attempting to slow the economy by making money harder to get is, naturally, not ideal for business growth. So for most businesses, these conditions make it harder to grow, invest, and profit. Generally the stock market (i.e. Wallstreet) really doesn’t like this, as high interest rates really cramp their style of easy money.
One thing you’d also expect to see with these conditions is an increase in unemployment – rougher conditions for business generally means there will be less jobs to go around. But this hasn’t happened – in fact, the US economy keeps adding jobs! Great, right? Well… not exactly, because the economy is still “too hot” and inflation is still high. High inflation and low unemployment means the Fed will continue to raise rates until one of these things changes. So most people think that the most likely reason for the Feds to stop raising interest rates (and maybe even decrease them again) is for the US economy to stop making so many jobs and start losing some. In other words: a recession.
So often you’ll see the stock market fall when a really good jobs report comes out – it means that the most important companies in the stock market indices will have less access to easy money because the Fed is expected to increase rates even more.
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