The Federal Reserve (also called “the Fed” or the “Federal Reserve System”) – the central banking system of the USA has increased its “benchmark interest rate” by another 0.75 per cent or 75 basis points in its recent monetary policy meet.
Benchmark rates in the US currently sit at 3.25 per cent after the latest Federal Reserve Interest Rate Hike.
This is the 3rd successive interest rate hike by the Fed this year rate and policy-makers at the central bank are signalling they aren’t done yet (officials forecasted that they will lift the rate to roughly 4.4 per cent by year’s end).
Let’s understand how this interest rate hike will influence (the US) Economy,
Federal Reserve Hike Interest Rate
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An increase in interest rates will slow down investment and interest-sensitive consumption in the US.
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By slowing down this interest-sensitive investment and consumption, the Fed intends to bring down overall demand in the economy.
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By bringing down overall demand in the economy, the Fed intends to slow down inflation (which is the biggest for the US now) or price rise.
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A slowdown in the US economy will bring a slowdown in other economies as well since the US is one of the biggest importers of goods and services from countries across the world.
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Exports of countries such as India (maybe IT-related businesses) will be badly impacted because of a sustained economic slowdown or probably recession in the US.
Let’s now understand how this influences Stock Market,
Federal Reserve Hike Interest Rate
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An interest rate hike by the Feb also means increasing the cost of money in the US.
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Foreign Investors (FIIs) based in the US will therefore demand a higher return from their equity investments (countries such as India).
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Many of them will tweak some of their cash out of these markets by selling their investments.
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This will create selling pressure in equity markets, like ours.
Also Read: Nifty prediction for September 2022
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