First of all, we should understand what is an interest rate hike, why it will happen, and what changes will it bring to the market? Here, Yixuan will share his own understanding with you:
The Fed's interest rate hikes and cuts are actually a process of periodic shearing of the US dollar, reflecting changes in market interest rates. If the Fed wants to lower the market interest rate, it will purchase US Treasury bonds through primary dealers, thereby putting US dollars into the market. When there are more US dollars in the market, the interest rate will fall.
Conversely, if the Federal Reserve is about to enter a cycle of raising interest rates, it will sell a large amount of Treasury bonds to the market and recover US dollars from the market. As the market liquidity of the US dollar decreases, it will become scarce, causing the market interest rate level to rise.
If the Fed wants to lower or raise short-term market interest rates, it will buy or sell short-term US dollar bonds, and if it wants to lower or raise medium- and long-term interest rates, it will buy or sell medium- and long-term US dollar bonds. From a monetary perspective, the Fed's interest rate hike is to recover US dollar liquidity, making the US dollar scarce and valuable, making the US dollar more valuable, and its purchasing power also increases. At the same time, the US dollar index will also begin to strengthen and rise.
Secondly, what consequences will the Fed's interest rate hike lead to? The US dollar is the world's currency and dominates the global financial and monetary system and trade settlement system, which means that the Fed's interest rate hike will not only have an impact on the US economy, but also have different impacts on other economies around the world. So what consequences will the Fed's interest rate hike lead to? We need to look at it from two aspects.
The consequences of the Fed's interest rate hike on the US economy From the perspective of the financial market, the Fed's interest rate hike means a reduction in US dollar liquidity, which will drive the US dollar index to strengthen, increase the scarcity of US dollar assets, and make the US dollar more valuable. During the Fed's interest rate hike, it needs to sell US bonds to recover US dollars. This process means that the number of treasury bonds in the market will increase, the price of US treasury bonds will fall, and the yield of US bonds will begin to rise.
For the U.S. stock market, the Fed's interest rate hike is equivalent to withdrawing the dollar liquidity in the market and increasing the cost of dollar financing, which will affect the liquidity of the U.S. stock market, resulting in a downward adjustment, and the three major U.S. stock indexes will experience a dive. In the later period, with the capital return brought about by the U.S. dollar interest rate hike, the liquidity of overseas markets and the returned dollars will bring about a rebound in the U.S. stock market, and the cheap dollars and debt bubbles that flowed into the U.S. stock market and pushed up the price of U.S. stocks in the early interest rate cut cycle will be digested, and the U.S. financial market will also solve the debt risk and asset bubble, and achieve a smooth transition.
From the perspective of the economic cycle, when the US economy returns to stability and full employment, the Federal Reserve will enter a cycle of interest rate hikes. The interest rate hikes will attract a large amount of capital inflows, promote the growth of the US real economy and the expansion of production capacity, and ultimately not only absorb inflation, but also maintain the medium- and long-term recovery and growth of the US real economy.
The consequences of the Fed's interest rate hike on other emerging economies in the world. The Fed's interest rate cut is to release risks to other economies in the world. Therefore, when the Fed enters a rate hike cycle, it will also have an impact on other economies in the world. From the perspective of international capital flows, the Fed's interest rate hike will lead to a large amount of capital flight from emerging economies. The funds that originally flowed into emerging economies will turn to the US market to pursue higher interest returns and financial asset investment returns, bringing about a huge shock to the global financial market.
Most emerging economies rely on the US dollar hegemony system and support the free convertibility of the US dollar. Once the Federal Reserve raises interest rates, a large amount of capital will flow out, which will impact the country's financial stability and cause liquidity shortages.
Some economies that are short of US dollar foreign exchange reserves and rely on overseas capital inflows for investment may even see a collapse of their financial markets, and the continuous depreciation of their own currencies will eventually impact the real economy, leading to a regional financial crisis or economic crisis. From the perspective of real trade, the arrival of the US dollar interest rate hike cycle often means that the US economy has improved and the US dollar index has continued to strengthen, while emerging economies have not recovered or have weak economic fundamentals and their own currencies have also weakened. For emerging economies, this means a loss of export trade competitiveness, affecting the virtuous cycle of economic trade.
Due to the imperfect financial systems and lack of liquidity management tools in many emerging economies, domestic financial assets had already seen a bubble rise in the early stages of the dollar's proliferation, inflation had also risen sharply, the currency appreciated externally and depreciated internally, and a large amount of financial risks and bubbles accumulated. Once the Federal Reserve suddenly raised interest rates, the fragile financial system and economic and trade volume would not be able to cope with the liquidity reversal brought about by the dollar interest rate hike, and would eventually fall into a passive dilemma.
The Fed often raises interest rates when the U.S. economy is improving or inflation is out of control. In the early stages, it will impact the U.S. stock and bond markets, but in the later stages, it will often attract a large amount of capital to flow back to the U.S. market, digest the debt bubble of the U.S. stock market, and promote domestic economic growth and capacity expansion in the United States. #美联储利率决议
