The stock market reaction to a tightening of the Fed's monetary policy will be slow. In fact, the stock market has already started to react to this event, which in fact has not even started yet. Experts believe, that in the future one should not expect an immediate market collapse once the Fed has raised rates for the first time. Most likely, the stock market has already moved into a state of correction and in the coming months, amid a complete withdrawal of stimulus in the US, it is unlikely that we should expect new highs. Experts also note that the size of the rate hike in March will have a huge impact on the stock market. After all, it was initially assumed that the increase would be 0.25%. However, more and more experts are convinced that the rate will be raised at once by 0.5%. Firstly, US President Joe Biden unofficially asked Jerome Powell for this late last year. Secondly, the current level of inflation urges maximum action right now.
However, some experts also suggest that the correction this year will be smooth but strong. If the Fed hikes the interest rate by 0.25% in March, the stock market could react with a small decline, as it is already fully prepared for it. Furthermore, a rate hike from near zero (as it is now) might not cause a strong fall, for the reason that the rate would still remain quite low. Notably, the stronger effect of a rate hike might be seen when the rate rises to 1% and continues to rise thereafter.
At the same time, some experts started to restrain the stock market from a serious fall. A similar situation can regularly be seen in the cryptocurrency market, where a great many people are constantly predicting that bitcoin will rise to $100,000 or more. They do so on both a bullish and a bearish trend. That is, in their opinion, bitcoin will always rise. There is an unspoken rule in the stock market: "Don't fight the Fed". It means that during periods of low interest rates you should invest heavily, and during periods of high interest rates you should reduce your positions and investments. At the moment, however, experts believe that this rule will not work, as the Fed is only at the very beginning of a rate hike. All in all, most expect a fall this year, but hardly anyone expects a collapse. Thus, for all three leading indices, we are likely to continue to see a slight decline this year.
