Facebook Twitter

Stocks tumbled to a record low on Friday. What does this mean for the economy?

The Federal Reserve announced that they plan to increase interest rates into next year

SHARE Stocks tumbled to a record low on Friday. What does this mean for the economy?

FILE - Traders work on the floor of the New York Stock Exchange on Tuesday, Sept. 13, 2022.

Julia Nikhinson, AP Photo

Major stocks saw huge losses as the market tumbled on Friday, according to CNBC. Some economists think that the country will have to see a recession before inflation ebbs away.

The numbers: The Dow Jones Industrial Average tumbled to a record low this year, losing 486.27 points, sitting at 29,590.41.

  • The S&P 500 dropped 1.72%, down to 3,693.23, and the Nasdaq composite fell 1.8% to 10,867.93.
  • On Friday, the U.S. dollar also hit a record high in 20 years, according to Reuters.

Federal interest rate hike: On Wednesday the Federal Reserve increased the federal interest rate by a range of 3 to 3.25%. When interest rates increase, stocks tend to fall.

  • The interest rate hike was done in an attempt to curb high inflation rates, which are resulting in “supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures,” the Federal Reserve said in a statement.

Why do stocks fall when interest rises? In short, Forbes states that “when interest rates rise, stocks tend to fall in value because of future earnings.” Meaning that when interest rates are high, companies are less likely to borrow, potentially leading to slower earnings.

  • Forbes continues to state that some economists think that raising the federal interest rate will strain the economy for a moment, but will eventually lead to a boom. On the other hand, some think that reining interest rates will push the economy further into a recession.

Looking ahead: Some market experts believe that in order to curb inflation, the economy will have to brace for a recession.

  • According to MarketWatch, the Fed hinted that they intend to keep raising interest rates into next year, and not stop until inflation falls. In other words, it is likely that things will be tight financially before they can get better.