Why are the stock markets falling on account of the Fed Interest Rate Hike?
Summary: It gets more expensive to borrow money > Consumer spending will decline/Corporate Investments may go down
Consumer will choose to save more since they get a higher interest rate on their savings/deposits with Banks
The combination of lower consumer spending and increased saving may cool off the economy.
Global investors– move away from the emerging markets and buy developed markets during such time.
Some details:
– Fed had declared that they would be raising the interest rates, however, markets fear that Fed would do it more aggressively (quickly)
– Fed Balance Sheet size is $9 Tn – They intend to run off their balance sheet i.e. Reduce the size of Balance Sheet by by reducing bond holdings- Fed would not roll over the bonds- ie. they would not once again, subscribe to the bonds on maturity.
Did you Know:
– Fed even bought bonds with BBB ratings!!-
– Existing bonds, which are giving X%, would have a lower value, since new bonds would come into market, giving X+1% return
– Everyone- consumers and corporates, end up paying higher interest – Increase in EMI, means lesser surplus for consumption.
– People will park money in debt instruments, leading to a decrease in money supply in the market (hence, lowering the inflation).
– However, banks may be flush with money from depositors.Banks may stand to earn more interest- as they would also hike the ROI on loans.
– Borrowers may postpone the decision to take a loan. Thus further, reducing money supply from the market.
– Higher Cost of Funds and lesser consumption demand, would impact earnings of companies, thereby impact their profits.
What next? Will the stocks see a rise going forward?
Depends on the earnings that they report- Higher earnings can result into higher stock price.
SmallTownGuy 