Dan Passarelli, CEO - Market Taker Mentoring

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Lots of questions lately about interest rates and the Fed raising them and how it affects the market and the economy and are we in a recession? When does that happen?

So let's talk a little bit about the timing of such things. First of all, when interest rates go up, what that does is it makes it more costly for businesses to borrow money. That puts a little bit of pressure on businesses and kind of cools the economy down. It doesn't happen immediately. If interest rates go up today, that might not work its way into the economics of any given corporation for some time.

In fact, it's been said that a change in interest rates can have around twelve months to take effect. So all this price action in the stock market that we're seeing where when interest rates look like they might go higher, the market sells off and vice versa. It's traders getting ahead of things.

The interest rates that we've seen over the past couple of months, the interest rate hikes that we've seen over the past couple of months really won't have its effect on the economy for another six months to a year. Now, all that said, will this lead to recession? Well, technically, we're in a recession already. The original definition of recession is two negative quarters of GDP in a row, which we've had. They've since sort of changed definition, and it's not very objectively stated anymore. It's kind of hard to talk about things when it's opinion based. Right? So we're sticking with the classic definition. Two negative quarters of GDP in a row is a recession.

There's still a bunch of other economic data. Like, we saw the job reports come out last week and so many more jobs were added. Inflation is very hot, which is a sign of an overstimulated economy. So there's still some information being parsed out. It's a very different scenario now with supply chain issues and all that. Perhaps the most important thing to get across is that these interest rate rises won't really affect the market for several months.

Six to twelve months from now is when they'll be felt. So think about that and your timing. The stock market reacts very quickly to these individual events and the news that can influence these individual events. But the actual effects on the economy move a great deal slower. So keep that in mind in your trading and investing. I hope that helps.