from the Walter Cronkite school
of journalism at Arizona state
university.
Judy: Today's interest rate hike
from the fed was the sixth one
this year.
It has been decades since the
fed has acted this aggressively
to slow inflation.
It's an approach that has been
supported by some economists but
is also being criticized as
excessive by other economists
and by a number of democratic
lawmakers.
Markets reacted strongly to the
comments by
fed chairman
Jay Powell.
At first, traders and investors
were encouraged by a statement
suggesting there could be a
pause or a slower pace of rate
hikes.
But about a half hour later, the
chairman expanded on that idea.
>> At some point as I've said in
last two press conferences, it
will be appropriate to slow the
pace of increases as we approach
the level of interest rates that
will be significantly
restrictive to bring inflation
down to the 2% goal.
There is significant uncertainty
around that level of interest
rates.
Even so we still have some ways
, to go.
And incoming data since our last
meeting suggests that the
ultimate level of interest rates
will be higher than previously
expected.
Judy: The latter part of those
remarks -- about some ways to go
and how the ultimate interest
rate level could be higher than
previously expected -- seemed to
badly rattle investors.
All the major stock indexes fell
significantly afterward,
including the Dow Jones
industrials, which saw an
800 point negative swing after
his remarks.
The comments also had a mixed
effect on the value of bonds.
These market swings tied to
interest rates can be hard to
understand -- and it affects
people's net worth.
Economics correspondent Paul
Solman tries to help break down
how investors see the impact of
higher rates over the long term.
>> Have taken a hit of $48,000
to my 401(k).
>> I feel like basically, when
stocks go down, bonds are
supposed to go up.
>> It's kind of like a seesaw.
They would balance each other
out.
I thought the first indication
would be ok.
>> It's been a scary year for
those of us counting on our
investments, with both stocks
and bonds having tank in tandem.
The consensus culprit,
inflation, and the effort to
suppress it.
>> The fed is attempting to slow
inflation.
>> What is a bond?
>> A bond is a form of debt.
The way the government's borrow,
they say give us some money now
and we will give you money back
in future and we will pay some
interest along the way.
This is a form a bond, so you
can sell it to other people.
It is a tradable debt.
>> What is happening now that is
killing the bond market and
making bonds worth less than
they were?
>> When the government goes to
issue debt, which it does on an
almost daily basis, it has to
offer a higher interest rate.
You look at all debt and say I
can buy the old debt from you,
but I want it to match the yield
I get on the new debt.
The way to match it is for the
value of the old debt to Paul.
>> Like back in the 1970's when
gradual inflation surged due to
a gasoline shortage fueled by
OPEC.
Interest rates surged in
response.
So let's go back in time.
I brought with me a facsimile of
a bond from 1976 and I got the
1970's Thai.
You have a 1984 bond.
>> I'm wearing and Adam Smith
free-market tie.
>> About this and it was at 8%
interest rate.
It's now 1984, I need the money,
so I want to sell this to you,
so give me $5,000.
>> I appreciate the offer and I
do recognize this is a U.S.
Government debt so it is good
for payment, but I'm a little
put off by the interest rate.
But I have one right here that's
offering me 12.15% interest
rate.
Interest rates have gone up, so
I will buy the old bond for you,
but for less than $5,000, and
I'm fine with that.
>> This is my when interest
rates go up, now bond values,
the bond market, goes down.
>> The interest rate being
offered on new bonds is higher
than on the old bonds, so you
need the yield to match in order
for people to be willing to buy
the old bonds.
Otherwise they will buy new
bonds.
>> Ok, but it doesn't explain
why stocks sank also as interest
rates rose.
>> The king of Sweden gives you
the old metal in that case.
Why does it have value?
It has value because you have
rights to the current and future
earnings of the firm.
>> Why are stocks going down
now?
>> You have to understand three
elements that enter injured
their value or change in value.
First, the earnings.
The second factor is, are the
earnings going to grow from
here?
That would be good, makes it
even more valuable, or are they
going to decline and make it
less valuable?
The future earnings in stock are
risky, unknown.
The future payments on bonds are
known.
To compensate people for taking
the risk of uncertainty about
the future earnings of stock,
they have to be comp aside --
compensated with a higher than
expected yield on bonds.
>> I ask you why our stock
prices going down, you say to me
concerns over possible
recessions in the future.
We know that the fed is
purposely trying to raise
interest rates, so we know
there's a greater chance that we
might have a recession, which
means lower earnings, and
competing rates, greater
uncertainty, the impact of
inflation, all those things.
Put it together, it's not a
surprise.
The question is, what will they
do tomorrow?
It depends on what new
information we have, compared to
what we know today.
>> So there is no simple answer
to stocks continuing to go up or
down.
>> You cannot do it and giving
830 second soundbite answer as
to why the stock market is going
to go up or down.
Tell us the reason, when there
are multiple reasons.
It's too complicated.
I wish I could tell you
otherwise, but that's how it is.