Hello everyone, my name is Mu Bai. Today I will discuss what impact the Federal Reserve’s interest rate hike will have on the money market. Some people say that by raising interest rates, the Federal Reserve is harvesting the currency circle or even the entire world. What do you think?
The Fed's main purpose of raising interest rates is to control inflation and maintain economic stability. Here are some reasons to raise interest rates:
Controlling Inflation: When the economy is doing well and the job market is tight, increased demand can lead to higher inflation. By raising interest rates, the Fed attempts to curb overheating economic growth to prevent inflation from accelerating.
Maintaining economic stability: Moderate interest rate increases can help stabilize the economic cycle and prevent the economy from overheating and overcooling. By adjusting interest rates, the Fed can adjust the cost of borrowing for consumption and investment, affect the credit needs of businesses and individuals, and thereby adjust the speed of economic activity.
Prevent asset bubbles: In some cases, a low interest rate environment may prompt investors to overinvest in risky assets, which may lead to the formation of asset price bubbles. By raising interest rates, the Fed attempts to curb excessive speculation and unstable market behavior to maintain financial stability.
Increase monetary policy space: When economic growth is good, the Federal Reserve will gradually increase interest rates to have more room to cut interest rates when the economy downturns in the future. This would provide more leverage for stimulating policies in response to a recession or financial crisis.
The Fed will make its judgment based on multiple factors, including job market data, inflation rate, economic growth, financial market conditions, etc. Decision-making is a complex process that aims to balance the needs and stability of all aspects of the economy. So is raising interest rates a good thing or a bad thing for the currency circle? Well, let’s put it this way, an interest rate increase means that you can get more interest by depositing it in the bank. If the interest rate increases, will you choose to deposit your money in the bank to earn interest? Everyone’s money goes into the bank, and other places are It’s not that there is no capital flow, it’s a negative for the currency circle, and vice versa.
Is the Federal Reserve’s interest rate hike harvesting the world? Some people do spread rumors and conspiracy theories in an attempt to create false accusations and conspiracies against the United States or other countries. However, by comparing and analyzing the facts, we can see the weakness and low-level nature of these rumors. For example, someone once claimed that the purpose of raising interest rates was to harvest the whole world, but we can think about a question: How do they achieve the purpose of harvesting the whole world by raising interest rates? Did they buy other countries’ core assets after raising interest rates? Are these countries willing to sell their core assets to them? Clearly, this theory doesn't hold up.
For another example, some people claim that after the subprime mortgage crisis in 2008, the United States triggered the European debt crisis and purchased core European assets such as Airbus and automobiles. However, the fact is that China actually has stakes in Mercedes-Benz and Volvo, not the United States. These rumors lack evidence support and can be said to be very low-level. A similar situation occurred during the Asian financial turmoil in 1997. Some people claimed that American capital had purchased real estate in Thailand and the Philippines, but this was not the case. After Japan's economic downturn, the United States did not take advantage of Japan's domestic electronics and automobile industries. These people were unable to provide evidence to support their claims. Additionally, rumors about petrodollars are rife. In fact, the U.S. dollar index and crude oil prices are negatively correlated. The stronger the U.S. dollar index, the lower the crude oil price. The ruble and crude oil are absolutely positively correlated. The ruble peaked and crude oil peaked on almost the same day, and they also fell at the same time. This can be proven by facts. The relationship between oil and the ruble is a fact, not a rumor. Similarly, some people claim that the United States invaded Iraq for oil, and in the end, China National Petroleum Corporation did enter Iraq.
As for the Fed raising interest rates, its only reason is to control inflation, not to help the economy. This may be difficult for most Chinese to believe, but it is true. The Federal Reserve is a federation of private banks whose members are not civil servants, are not government agencies, and are not under the direction of the U.S. government. The Fed's policy proposals are submitted directly to Congress for approval without the approval of the U.S. government, and it has considerable independent policy capabilities. The credit of the U.S. dollar is relatively good, and the monetary policies of many countries are tied to the U.S. dollar. Therefore, when the U.S. dollar raises interest rates, central banks in other countries will also follow suit, including Hong Kong.
In the past, every cycle of US dollar interest rate hikes would cause harm to its own economy, and would also indirectly affect the economies of other countries, thus triggering rumors of harvesting the world. In fact, the cyclical interest rate hikes of the U.S. dollar are an important reason why the U.S. dollar has become a global currency, because after interest rate increases, it will indirectly shrink the balance sheet, keeping the total amount of U.S. money within a controllable range. The euro will behave similarly because of its link to the U.S. dollar, and the euro is also the dominant currency in world trade. Through simple logical reasoning, we can conclude that international trade requires long-term monetary stability similar to gold, and the total currency cannot expand indefinitely. Otherwise, long-term depreciation of the currency held in hand will directly lead to losses, and international merchants will not be willing to accept this situation.
Precisely because the U.S. dollar will indirectly shrink its balance sheet after raising interest rates, it provides the basis for the U.S. dollar to maintain a strong currency value in the long term. According to the Fed's indicator, the annual inflation rate is 2%, then the currency will depreciate by 50% after 36 years and 75% after 72 years. For a person's lifetime, a currency devaluation of 75% is acceptable. The currencies of many countries have devalued by 99% in 70 years. Under such standards, how will international traders choose? If we cannot view these phenomena based on the actual situation, but instead make up and conjecture conspiracy theories ourselves, we will not be able to make any accurate judgments on market trends.
At the end of last year, many so-called "big Vs" claimed that the United States would not raise interest rates to 5% and would cut interest rates soon. This was completely groundless speculation and nonsense. Whether the Fed raises interest rates depends solely on inflation indicators. Historically, it usually takes at least six months between the last rate hike and the rate cut. These people neither look at history nor pay attention to facts. They only make up rumors.
In summary, we should make judgments based on objective facts and data, rather than purely fabricating and spreading rumors and conspiracy theories. In this way, issues in the economic and financial fields can be more accurately understood and analyzed.