Falling tech stocks, rising interest rates, and inflation fears — how they’re connected

Wednesday, February 24, 2021 by Snacks

New haircut?... Markets look a little different recently. The tech-stock heavy Nasdaq index is down nearly 5% for the week: strange, since Big Tech has been on a tear over the past year. Also: interest rates are rising from historic pandemic lows. The 10-year Treasury yield (basically: the interest rate the US government pays to borrow money) has risen to its highest level since February 2020. The average interest on a 30-year-fixed-rate mortgage also rose.

What's going on?... Falling tech stocks and rising interest rates are likely related to one thing: inflation fears. Investors are scared that the purchasing power of the dollar will decrease and prices will rise — or, that a $4 coffee today could cost $6 in a year. To help the economy, the Fed has added trillions to the money supply through stimulus packages and bond-buying sprees. And we could get another $1.9T stimulus package soon. That increases cash in circulation, which could boost inflation risk.

  • Why interest rates are rising: With so much cash in the system, people are worried that the money they receive in exchange for lending could be worth less in the future. So they’re “demanding” higher rates from bonds.
  • Why tech stocks are falling: Rising interest rates can make bonds and savings accounts more attractive compared to riskier assets (like tech stocks). They also increase the cost of borrowing. That can curb profits, growth, and hiring for companies — and result in less consumer spending, which is generally bad for the economy.

Inflation is the Godzilla of finance... But we might not have to fear it just yet. Yesterday morning, Jerome Powell said the Fed is committed to its current policy of keeping interest rates low. He’s not immediately concerned about inflation levels, which have stayed relatively low for a decade — he is concerned about getting the economy back on its feet. JP's announcement helped calm inflation worries, so tech shares mostly rebounded for the day.

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