In Wall Street Warriors, students write about important aspects of the finance field as well as news in the stock market. This week, junior Bennett Szafranski discusses the effects rising interest rates will have on the economy.
By: Bennett Szafranski (11th)
This past week, the stock market fell to its lowest level since March of 2020. The main reason for this is the rise in interest rates. The Federal Reserve raises interest rates to stop inflation. Last week, Jerome Powell, the chairman of the Federal Reserve, announced that the Federal Reserve system will be raising interest rates by point five percent, making it the largest increase since 2000.
Interest rates have a large impact on how the stock market does all year round. Rising interest rates mean that the cost of borrowing money becomes more expensive so it is harder for businesses to purchase the materials they need. When interest rates rise, most companies cut down on how much they spend during each quarter, causing them to have lower earnings and stock prices.
The main type of stocks that suffer from this is growth stocks. These companies are primarily valued at how much money investors think they will be making in the future. When the interest rate gets higher, the value of those future earnings becomes lower. At this point, investors are now moving their money from growth stocks and putting them into stocks that are proven to be established and undervalued. Since the rise will have a larger effect on the growth stock than the value stock, investors tend to go in that direction. These safer stocks include ones in the energy and finance sector, while the technology sector is much riskier.