Since the beginning of 2022, there have been two hot words in the financial circle, one is raising interest rates, the other is shrinking tables. The Fed's rate hike, a blockbuster investment circle event that has been hotly debated in global financial markets for more than half a year, is finally expected to hit the ground this week.

The Fed's FOMC will hold a two-day interest rate meeting from March 15 to 16. The market expects the meeting to kick off a rate hike. Powell, chairman of the Federal Reserve, previously said that he would consider raising interest rates by 25 basis points in March to curb inflation.

The Fed has raised interest rates many times before. Why is it getting so much attention this time? What will be the impact of raising interest rates? Will it affect your purse?

What's with the interest rate hike?

The most common monetary policy operations of the Federal Reserve are interest rate hikes, interest rate cuts and table expansion and contraction. To sum up, it is to do "addition and subtraction".

Whether the Fed raises interest rates or not, it mainly focuses on two indicators, one is inflation stability, and the other is employment maximization.To raise interest rates is to raise the federal funds rate, which is simply the interest rate at which commercial banks lend to each other.

When the Federal Reserve raises interest rates, the deposit and lending rates of commercial banks will naturally change accordingly.The purpose of raising interest rates is to increase bank deposits, reduce loans and return money, which can restrain social investment and consumption, cool down when the economy is overheated, and avoid an economic crisis.

On the other hand, the operation and purpose of cutting interest rates is just the opposite of raising interest rates, mainly to stimulate economic growth by cutting interest rates to increase the money supply when economic development is weak and recession. For example, this may bring benefits to the stock market and real estate market, can increase social employment and so on.

Expansion and contraction refer to the expansion and contraction of the Fed's balance sheet, respectively.Specifically, increasing or reducing the holdings of US treasury bonds and mortgage-backed securities can also achieve the purpose of increasing or reducing the amount of money in circulation in the market and adjust the hot and cold of the economy.

What is the impact on ordinary people?

Some people may say that if the Fed raises interest rates, what does it have to do with us Chinese investors?

There is a saying in the investment circle: the Federal Reserve roars and the world shakes three times. As a superpower, the United States will exude a huge spillover effect in its every move.

The Fed's rate hike is both good news and bad news. The good news is that the Fed's rate hike means a strong recovery in the US economy, and exports from some economies are expected to improve.

The bad news is that higher interest rates mean a reduction in the supply of dollar funds in the US market, expected interest rates and yields to rise, and some cross-border flows back to the US.

For some emerging economies, this could mean capital outflows, which could lead to a decline in the exchange rate of their currencies. If there are not enough foreign exchange reserves, it may mean risk, but if there are sufficient reserves and resilience, it is not a problem.

Why is this interest rate hike important?

If the Fed really raises the federal funds rate in March as expected by the market, it will be the first time that the Fed has raised interest rates in more than three years since December 2018, and it will also officially mark its complete withdrawal from the quantitative easing caused by the COVID-19 epidemic. A substantial step towards the normalization of monetary policy.

Looking back at the Fed's three interest rate hikes since the 20th century, monetary policy normalization was initiated mainly on the basis of curbing the Internet, the housing bubble or recovering the massive liquidity released by quantitative easing. the process is always accompanied by a sustained recovery in the US economy until it is overheated, full employment and upward inflationary pressures.

How does the Fed's rate hike affect global asset pricing?In theory, as the dollar is a global currency, most central banks will have to follow the Fed to raise interest rates and protect the exchange rate, which will have a short-term impact on the stock market.

From the perspective of the whole cycle, US stocks and Hong Kong stocks have risen to varying degrees in the first three interest rate hikes of the Federal Reserve.It shows that the increase in interest rates will impact the stock market in the short term, but it is difficult to change the long-term upward trend of assets.

The market predicts that the Fed is likely to raise interest rates in the same way as it did in 2015-2018, with both a rate hike and a contraction, which could lead to greater volatility in asset prices. The data show that in the last cycle of interest rate hikes, the Dow Jones Industrial average fluctuated sharply in 2015 and 2018. But given that US stock valuations are at relatively all-time highs, the impact of higher interest rates on US stocks may be more pronounced than last time.

History will repeat itself, but it is by no means a simple repetition, and the impact of the Fed's three interest rate hikes on global stock markets cannot be simply replicated.

As the Wall Street Journal quoted former Fed governor Laurence Meyer (who famously discussed raising interest rates in the 1990s): "what are you worried about? Will interest rates be raised in September or December? It doesn't matter. All you have to do is pull the trigger. "