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The Stock Market Reaction To Fed Rate Hikes Is Detrimental To Economic Prosperity

Daniel Plainview

Updated: November 3, 2022

stock market reaction to rate hikes
Editor’s Note:

EDITOR'S NOTE: Billions of dollars in equities have been erased from the market over the last few months. Gold too has plunged, but not with the same intensity and depth as the recent stock market reaction. The dollar has soared mostly due to international weakness in most major currencies. This partly explains why gold hasn’t yet risen as many experts have anticipated. International investors looking for safe havens typically flock to US debt instruments, boosting the dollar. Yet the dollar is currently at a twenty year high. What conditions might cause investors to seek safety in gold rather than the dollar? Here’s what experts are saying…

Source: Kitco News

The S&P 500 shed more than $800 billion on Wednesday, falling 2.5 percent in a day’s trading after the Federal Reserve announced that it would raise interest rates by 75 basis points. Despite the stock market’s reaction, the Fed is not done raising rates and tightening, according to Gary Wagner, editor of

“They’re looking to move interest rates to 5 percent, minimum,” said Wagner. “That is going to truly be detrimental to economic prosperity.”

The Fed is tightening in response to high inflation, which was 8.2 percent in September. Wagner claimed that had the Fed started raising rates in 2021, economic “pain” could have been avoided.

“The Fed didn’t act in 2021, when interest rates began at 1.4 percent,” he said. “Back then, a quarter percent or half percent rate hike would have had a dramatic impact [on inflation].”

Wagner spoke with David Lin, Anchor and Producer at Kitco News.

Gold and the U.S. Dollar

Gold, which is currently trading near $1,630 an ounce, has fallen 10 percent over the year. Wagner said that due to uncertainty, investors are fleeing to the U.S. dollar, which is viewed as a safe haven asset. This combined with rising yields, has put downward pressure on gold.

“It’s like looking at a basket of rotten apples and you pick out the least rotten apple, and that’s the dollar,” Wagner explained. “If you’re an international investor looking to park money, you’re going to go to our debt instruments, and not debt instruments of other countries. That fact is giving us U.S. dollar strength.”

He added that there is a “negative correlation between the dollar and gold,” since they are viewed as substitute investments.

“The dollar has been sitting at a twenty year high,” he said. “It’s this extreme dollar strength that is forcing people to not look at gold as a safe haven asset that will appreciate.”

To find out Wagner’s gold price forecast over the next two years, watch the video above

Follow David Lin on Twitter: @davidlin_TV

Follow Kitco News on Twitter: @KitcoNewsNOW

By Cornelius Christian

For Kitco News

Originally published on Kitco News.

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