Market Snapshot: Why 5% interest rates might not derail the stock market or the U.S. economy

by | Apr 16, 2023 | Stock Market

Here’s a thought for investors: If the Federal Reserve raises interest rates to 5% or more would that wreck the economy and stock prices ? The U.S. stock market has been rallying to start 2023, clawing back a big chunk of the painful losses from a year ago. The bullish tone has been linked to a view that the Federal Reserve will need to cut interest rates this year to prevent a recession, reversing one of its quickest rate-increasing campaigns in history.

Doomsday investors, including hedge-fund billionaire Paul Singer, have been warning against that outcome. Singer thinks a credit crunch and deep recession may be necessary to purge dangerous levels of froth in markets after an era of near-zero interest rates. Another scenario might be that little changes: Credit markets could tolerate interest rates that prevailed before 2008. The Fed’s policy rate could increase a bit from its current 4.75%-5% range, and stay there for a while. “A 5% interest rate is not going to break the market,” said Ben Snider, managing director, and U.S. portfolio strategist at Goldman Sachs Asset Management, in a phone interview with MarketWatch. Snider pointed to many highly rated companies which, like the majority of U.S. homeowners, refinanced old debt during the pandemic, cutting their borrowing costs to near record lows. “They are continuing to enjoy the low rate environment,” he said. “Our view is, yes, the Fed can hold rates here,” Snider said. “The economy can continue to grow.”Profits margins in focus The Fed and other global central banks have been dramatically increasing interest rates in the aftermath of the pandemic to fight inflation caused …

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