The global economy is almost entirely dependent on the dollar, meaning that the Fed's interest rate has a major influence on the entire economy. Let's try to understand the expected interest rate hikes by the Fed and their impact on the global stock markets.
What is the expected rate hike from the Fed next year?
The Federal Reserve recently raised interest rates by 0.75 percentage points for the sixth consecutive time. The central bank has supersized its hike by taking the benchmark lending rate from 3.75% to 4%. It is the highest fed funds rate since January 2008. As markets anticipated the rate hike, some investors expected it to be the last 0.75-point move.
According to the U.S. central bank's projections, Fed interest rates are expected to peak at 4.5% to 4.75% by 2023. Borrowing money becomes more expensive for businesses and individuals as interest rates rise. The question is, why the interest rate is so high?
What is the reason for the continuous rise in the Fed interest rate?
The fed funds rates control or decide how many financial institutions must pay to borrow, which then ripples out to businesses and households. The Fed can raise or lower the benchmark or funds rate based on the country's economy.
When the demand mismatches the supply, inflation happens. For example, cars and new houses were in great demand after the pandemic. But the supply was not enough to meet the demand. To slow down the demand, hiking the interest rate is an effective way. However, the discussion does not end here. The inflation rate reached a historic high after the end of the pandemic. In June 2022, inflation reached a record high of 9.1% year-over-year. Increasing interest rates is the Fed's main method for controlling inflation.
When the demand mismatches the supply, inflation happens. For example, cars and new houses were in great demand after the pandemic. But the supply was not enough to meet the demand. To slow down the demand, hiking the interest rate is an effective way. However, the discussion does not end here. The inflation rate reached a historic high after the end of the pandemic. In June 2022, inflation reached a record high of 9.1% year-over-year. Increasing interest rates is the Fed's main method for controlling inflation.
The impact of Fed interest rate hikes on the global stock market
The Fed's increasing interest rate will affect the global economy, including stock markets. Since the dollar dominates the global market, many central banks are forced to raise interest rates following the Fed, even if their inflation remains low. Unpredictability is roiling markets around the world. Currency values are plummeting. There is a hammering of oil prices and other commodities. Bond markets, Tokyo stock exchanges, and Shanghai stock exchanges are awash with fear and panic.
Besides, fixed-income investments will suffer from an increase in interest rates because bonds lose value when rates rise, and equities are also susceptible to shifting economic conditions. In the event of a Fed rate hike, businesses will have to pay higher borrowing costs. A lack of cash flows in such a scenario affects stocks that are not profitable the most. Higher interest rates mean higher borrowing costs for growth stocks, which depend on capital availability. The Fed's rate hikes will also negatively affect crypto markets.
Besides, fixed-income investments will suffer from an increase in interest rates because bonds lose value when rates rise, and equities are also susceptible to shifting economic conditions. In the event of a Fed rate hike, businesses will have to pay higher borrowing costs. A lack of cash flows in such a scenario affects stocks that are not profitable the most. Higher interest rates mean higher borrowing costs for growth stocks, which depend on capital availability. The Fed's rate hikes will also negatively affect crypto markets.
Final Verdict
To slow down the economy, the Fed is continuously raising interest rates. The result is a reduction in economic demand, which theoretically reels in prices and balances supply and demand, stopping credit investments and purchases. Many economists predict a recession in 2023 due to successive rate increases, resulting in sustained economic activity declines.
FAQs
What happens if the feds raise interest rates?
Raising interest rates makes it more expensive to take out a loan. Consequently, people will borrow and spend less, slowing the economy and raising prices.
How do I take advantage of a Fed rate hike?
To take advantage of the rate hike, you can increase your savings, invest in bonds, and refinance high-interest debt before interest rates increase further.
How does the Fed rate hike affect me?
Your credit card debt becomes more expensive when the Fed raises interest rates. Besides, the price of products will go up.
Will the Fed rate hike affect the stock market?
The stock market usually declines in value when interest rates rise. A rise in interest rates will result in a reduction in company borrowing.
