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Why Elon Cares So Much About Interest Rate Hikes

Elon Musk can't keep his eyes off today's Federal Reserve meeting. Why does he care so much? Because it might be the single most critical event to avoid an economic crisis.
Chris Hladczuk
Dec 14, 2022
2 minute read
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Elon Musk can't keep his eyes off today's Federal Reserve meeting.

Why does he care so much?

Because it might be the single most critical event to avoid an economic crisis.

Here's the breakdown (and why it matters)...

On December 9th, Elon Musk tweeted:

"If the Fed raises rates again next week, the recession will be greatly amplified."

Everyone thinks the Fed will raise rates by 0.50% today.

Why do this if it means a bigger recession?

Let me break it down in 60 seconds…

Imagine the U.S. economy as a $20 trillion balancing act.

You got a million-variable-algebra equation with no clear solution.

And a government org called The Federal Reserve with only a few tools to solve it.

The main one? 

Changing The Fed Funds Rate (FFR)

This is the US economy's "risk-free rate".

And every interest rate is based on it.

That means when the Fed hikes rates..

• Your mortgage

• Your venture debt

• Your company's bonds

Get way more pricey.

Why?

If the "risk-free rate" is 4%, you need to pay someone a higher rate on your mortgage to lend you money.

So, the whole economy moves based on this rate.

Okay so why ever change it?

The Fed Funds Rate is a tool for the government to do 2 things:

• Curb inflation

Higher the rate, people spend less and prices increase slower.

• Create growth

Lower the rate, money is cheaper for everyone to borrow and spend.

Now why is this big news?

8 times a year, the Fed meets to decide rates.

Dec. 14th is one of those meetings.

And for the few years, the Fed Funds Rate was close to 0.

But it just hit 4.0%.

Why?

Because the government printed lots of money during COVID to keep the economy alive.

Too much money printing = inflation too

And..

The way to stop inflation?

Raise rates.

Elon cares so much because when you have low rates, technology stocks are more valuable.

I'll spare you the boring details but it's because tech stocks are valued on creating cash far in the future.

And the lower the rate, the higher their value.

Now…

If you were Elon Musk and you owned a bunch of tech companies:

• Twitter 

• Tesla

• SpaceX

Would you want interest rates to be high or low?

Low of course.

Rising rates may help or hurt the economy in the long run.

But all I can tell you is Jerome Powell and The Fed are playing 4D chess and we only have one option:

Watch to see what happens next.

Written by
Chris Hladczuk
Chris HladczukDec 14, 2022
@chrishlad
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Written by
Chris Hladczuk
Chris HladczukDec 14, 2022
@chrishlad
Subscribe to our blog
Share this article
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