The interest rates in the United States have always been a focal point of global economic attention. Its fluctuations and volatility have had a significant impact on the global economy. In this blog post, MoneySmart will analyze the significance of the US interest rates in the global economy and explore whether they serve as an indicator of global economic fluctuations.
Table of contents: US interest rates
- What is a rate hike?
- Why raise interest rates?
- When is a rate hike needed?
- Other reasons for a rate hike
- Impact of US interest rate on the global economy
- 2024 outlook for US interest rates
- FOMC meeting schedule in 2024
- US rate cuts: How to set up an investment portfolio
- Conclusion
- Frequently asked questions: US interest rates
- Related articles
What is a rate hike?
A Rate Hike refers to the policy of a country or region’s central bank raising its benchmark interest rate as a means of tightening monetary policy. The benchmark interest rate refers to the Federal Funds Rate (FFR) in the United States, which is the rate at which banks lend to each other overnight.
The Federal Reserve, also known as the Fed, is the central bank of the United States. Its members determine the “target” for the Federal Funds Rate during their meetings. It is called a “target” because the Fed typically influences bank reserves through market operations rather than directly setting the rate, to ensure that the actual Federal Funds Rate aligns with the target.
Why raise interest rates?
What is the reason for central banks to raise interest rates? Generally, the primary purpose of raising interest rates is to control inflation, so there is a close relationship between interest rate hike and inflation.
The interest rate hike has an impact on both the economy and financial markets. When the central bank raises the Federal Funds Rate (FFR), the borrowing costs for banks and other financial institutions increase. This not only affects the investment costs of institutions but also directly puts pressure on borrowing for the general public, thereby affecting overall consumption and restraining economic growth and employment, achieving the goal of controlling inflation.
When is a rate hike needed?
When economic growth is too fast and the job market is strong, it can lead to overall price increases. In such cases, central banks can use rate hike as a tool to reduce money supply and curb demand, thereby controlling inflation. This is why inflation and interest rate hike are often mentioned together.
Other reasons for a rate hike
In addition, there are other possible reasons for central banks to raise interest rates:
Maintaining currency stability: A rate hike can increase the yield of the local currency, attract capital inflows, and enhance the purchasing power and value of the currency. For example, when the United States raises the interest rate, it increases the interest on savings accounts, attracting investors to park their funds and earn low-risk interest.
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Mitigating financial risks: A rate hike can curb excessive speculation and excessive borrowing, reduce financial risks, and promote financial stability.
In summary, the primary purpose of central bank interest rate hike is to control inflation and maintain economic stability, so there is a close relationship between rate hike and inflation.
Impact of US interest rate on the global economy
US interest rates play a crucial role in the global economy. As the world’s largest economy, the United States’ interest rate policies have wide-ranging effects on other countries and regions. Not only because the US dollar is a global reserve currency, but also because changes in US interest rates can trigger volatility in global financial markets.
Impact on currencies
Changes in US interest rates can have an impact on global capital flows. When US interest rates rise, investors may withdraw funds from other countries and invest in the US to seek higher returns. This can lead to a stronger US dollar, depreciation of other currencies, and capital outflows that adversely affect the economies of other countries. For example, the Japanese yen has been influenced by the high-interest rate environment in the US and has fallen to levels close to 151.52 JPY/USD this year.
Conversely, when US interest rates decrease, funds may flow into other countries, promoting economic growth and currency appreciation in those regions.
Impact on bond markets
Changes in US interest rates also affect the global bond market. The US is one of the largest issuers of bonds globally, and changes in US interest rates directly impact the fixed-rate bond yields levels in the global bond market. When US interest rates rise, the fixed-rate bond yields will follow as the bond prices went down, attracting investors shifting their capital from other investments to the bond market.
It is important to note that a tight financing environment can easily lead to cash flow problems for small and medium-sized enterprises, potentially resulting in bankruptcies.
Impact on real estate markets
Changes in US interest rates can also have an impact on real estate markets. For example, when interest rates decrease, loans become cheaper, incentivizing more people to purchase properties and driving growth in the real estate market. Conversely, when interest rates rise, loans become more expensive, potentially leading to a decline in demand and a recession in the real estate market.
Impact on global commodities
Additionally, changes in US interest rates can affect global commodity prices, particularly commodities tied to the US dollar. This includes products such as oil and energy, metals and precious metals, as well as agricultural products and food.
In summary, changes in US interest rates have significant implications for the global economy. Whether it is capital flows, the bond market, or other aspects, closely monitoring changes in US interest rates and their potential impact on the global economy is crucial.
2024 outlook for US interest rates
The speed at which US interest rates change directly affects the economy. The faster the rates turn, the greater the impact on the economy. The rate hikes from 2022 to 2023 lasted for over a year, but there was little market reaction.
Currently, it is advisable to monitor the Federal Reserve’s stance on interest rate hike or cuts in 2024 and adjust investment portfolios to avoid a sudden rate cut triggering a series of chain reactions.
Changes in US interest rates not only affect the domestic US economy but also have significant implications for the global economy. Just like the “butterfly effect,” a small change in US interest rates can potentially trigger a global economic storm.
Therefore, whether you are an investor or not, it’s important to keep an eye on the movements of US interest rates because they can sometimes bring unexpected surprises or shocks to our wallets.
FOMC meeting schedule in 2024
Investors can keep track of the US Federal Reserve’s FOMC Meeting schedule to get informed about the latest FOMC interest rates decision.
| Hong Kong Time | US Time | Change Basis Point | Rate Decision Result |
| February 1, 2024 | January 31, 2024 | To be determined | To be determined |
| March 21, 2024 | March 20, 2024 | To be determined | To be determined |
| May 2, 2024 | May 1, 2024 | To be determined | To be determined |
| June 13, 2024 | June 12, 2024 | To be determined | To be determined |
| August 1, 2024 | July 31, 2024 | To be determined | To be determined |
| September 19, 2024 | September 18, 2024 | To be determined | To be determined |
| November 8, 2024 | November 7, 2024 | To be determined | To be determined |
| December 19, 2024 | December 18, 2024 | To be determined | To be determined |
What is a FOMC meeting?
During the private FOMC meeting, the Board of Governors and all 12 Reserve Bank presidents will discuss the decisions of interest rates, monetary policy, and their reasons with economic performance indicators such as GDP growth, inflation, unemployment rate, and other economic data.
US rate cuts: How to set up an investment portfolio
When the US central bank cuts interest rates, it can have an impact on the investment environment. Here are some possible investment strategies that you can consider and further research and evaluate based on your individual circumstances:
Stock investments
Rate cuts usually have a positive effect on the stock market as lower interest rates reduce the financing costs for companies and investors tend to seek higher returns. Investors can consider increasing their holdings in leading stocks, especially in industries that may benefit greatly from a low-interest-rate environment, such as real estate, consumer goods, and technology companies.
Bond investments
Although rate cuts can be favorable for the bond market, please note that a decrease in interest rates may cause bond prices to rise while the yield on newly issued bonds may decline. Therefore, you can consider reallocating your bond investment portfolio to ensure that the overall yield matches your risk tolerance.
Commodity investments
Rate cuts can potentially weaken the trend of the US dollar, which may have a positive impact on commodity prices. Certain commodities, such as gold and other precious metals, are often favored by investors during economic instability. Investors can consider allocating a portion of their investment portfolio to these commodities or related investment tools.
Foreign exchange market
Rate cuts can affect the US dollar exchange rate. If investors anticipate a weakening trend in the US dollar, they can consider increasing their exposure to other currencies to balance their investment portfolio.
Remember that investments can go up or down, and the above information is for reference only and does not constitute investment advice. Please make decisions based on your financial goals and risk tolerance.
Conclusion
US interest rates play an important role in the global economy, acting as both a savior and a disruptor. Their fluctuations impact global financial markets and bring uncertainty to economies worldwide. However, we cannot deny the significance of US interest rates. Regardless, it is crucial to closely monitor their movements.
Frequently asked questions: US interest rates
How do US interest rates affect the global economy?
Changes in US interest rates have a significant impact on the global economy, especially on developing countries and emerging market economies. Higher US interest rates attract capital inflows to the US, leading to capital outflows from other countries, potentially causing currency devaluation and financial market turmoil. Additionally, the rise in US interest rates may increase the burden of global debt, particularly for countries and companies borrowing in US dollars.
How do changes in US interest rates affect the Chinese economy?
The increase in US interest rates can intensify capital outflows from China, posing a challenge to its economy. China relies on foreign capital, and higher US interest rates attract more funds to the US, reducing investment in China. Furthermore, the rise in US interest rates can lead to a depreciation of the Chinese yuan, increasing the pressure on Chinese companies with external debt.
How do changes in US interest rates affect global stock markets?
Rising US interest rates generally lead to a decline in global stock markets. Higher US interest rates make investors more inclined to allocate funds to the US bond market rather than the stock market, resulting in capital outflows from global stock markets. Additionally, the rise in US interest rates may increase financing costs for companies, putting pressure on stock market profits.
How do changes in US interest rates affect global commodity prices?
Rising US interest rates typically lead to a decline in global commodity prices. Higher US interest rates cause the US dollar to appreciate, leading to currency depreciation in other countries and subsequently lowering the prices of imported commodities. Furthermore, the rise in US interest rates may reduce global demand for commodities, putting pressure on commodity prices.
How do changes in US interest rates affect the global bond market?
The increase in US interest rates can create turbulence in the global bond market. Higher US interest rates increase the burden of debt, particularly for countries and companies borrowing in US dollars. Additionally, the rise in US interest rates may lead investors to reduce holdings of high-risk bonds, tightening financing conditions in the bond market.
How do changes in US interest rates affect global economic growth?
Changes in US interest rates have a significant impact on global economic growth. High US interest rates divert global capital to the US, reducing investment in other countries and exerting pressure on global economic growth. Additionally, the rise in US interest rates may increase the burden of global debt, limiting the financing capacity of countries and companies, further affecting economic growth.
Disclaimer:
Investment involves risks. The information on this article is for educational purposes only and should not be construed as investment advice or recommendations. Therefore, it should not be considered as the basis for making any investment decisions or taking any investment actions.
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