BREAKING: The FED Just RAISED Interest Rates - Stocks Falling, Housing Market FROZEN!
In a Nutshell
The Fed just hiked rates 25 bps for the first time since 2023 because inflation (CPI 3.4%, PPI 5.4%) and strong job growth (162k payrolls) give them room to act, and they now expect one more hike this year with rates held through most of 2027. Stocks are falling because strong economic data reduces the odds of future rate cuts, while housing is normalizing with higher mortgage rates (~7%) and rising inventory rather than crashing. The two paths ahead are either debt-driven inflation and volatility, or AI-fueled productivity growth that could add several percentage points to annual GDP.
These notes were generated by AI and may contain inaccuracies.
For the first time since 2023, the Federal Reserve raised interest rates by 25 basis points. This marks the end of a rate cutting era and raises questions about whether this signals the beginning of a new rate hiking cycle. Inflation is moving in the wrong direction again, the government is adding more than two trillion dollars a year to the national debt, and a bond market bailout is not making a difference. The Fed might keep interest rates higher at the exact moment the economy could least afford it.
The Federal Reserve measures inflation through multiple metrics. Producer price inflation measures the increase businesses pay before it reaches consumers, with the latest reading at 0.4% month-over-month and 5.4% over the last year. CPI, the headline inflation number, came in at 3.4%. The majority of this inflation came from oil prices.
The Federal Reserve's objectives include ensuring prices don't skyrocket and people stay employed. August payrolls rose by 162,000 jobs, more than double the expectation. This strong employment data gives the Federal Reserve room to raise rates without impacting people's ability to find work.
In 2026, bad news is actually good for stock prices. The stock market cares about lower interest rates, so weak job numbers, high unemployment, and horrible economic data are good for stocks because they increase the likelihood the Fed will lower interest rates. Conversely, strong job numbers, good economic data, and increased demand are bad for stocks. The market is in an environment where stocks want another hit of cheap money.
The US economy appears resilient enough to avoid a near-term recession. Enthropic forecasts 33% GDP growth by 2030 because of AI, with corporate profits looking good. However, historical data shows that since 1930, once a new Fed chair takes office, the stock market tends to see an average decline of 16%. September tends to be the weakest month for stocks. Bond yields are competing with stocks, and some charts suggest stocks are expensive.
Median home prices are higher year-over-year by about 3%, but new listings have surged with inventory hitting a six-year high. Mortgage rates have risen from just under 6% in February to closer to 7%. Cities seeing price declines include Austin, Texas down 8.1%, Clearwater, Florida down 5.6%, Memphis down 4.1%, and Oakland down 3.9% over the last 12 months.
Homeowners have record levels of equity, lending standards are sound, and inventory remains constrained. This represents a normalization rather than a collapse. Historically, when interest rates go higher, housing prices typically go higher, and home prices are more likely to go lower when interest rates go lower. Interest rates are only a small component of what drives housing demand.
The Federal Reserve unanimously decided to raise interest rates by 25 basis points. From their perspective, inflation is still high, employment is strong, and the economy can handle higher interest rates. The Federal Reserve controls short-term borrowing rates, but longer-term interest rates that dictate mortgages, business loans, and stock valuations are determined by supply and demand on the open market.
Investors are increasingly concerned that inflation is growing out of control, pushing yields up and prices down. Other countries have begun selling their US holdings to raise capital, pushing interest rates higher. The market has already begun pricing in higher interest rates without the Fed voting on an increase.
The Federal Reserve anticipates another rate increase by the end of the year and intends to hold rates throughout almost the entirety of 2027.
Two scenarios are possible: either the national debt grows out of control with inflation increasing and rates staying high with wild market volatility, or AI lifts the economy into a new era of productivity where the economy grows into valuations without a crash. Enthropic modeling suggests AI could add several extra percent to GDP annually in modest scenarios, or 30% in substantial or extreme cases.
Markets are forward-looking and already priced in current conditions. Key factors to monitor include inflation, oil prices, and the conflict in the Middle East. Expect more volatility until resolution occurs. The best prices occur when everyone thinks the economy is doomed, as seen in April 2025 and throughout 2022. Dollar cost averaging into markets is recommended regardless of volatility.
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