Federal Reserve's Interest rate hike

General
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I guess many have already heard the news that the US Federal Reserve will hike interest rates in mid-March. The Fed will tighten monetary policy, which means it will successfully raise interest rates. Not all at once, but over the next two years.

The increase in interest rates is mostly due to rising inflation. Jerome Powell, the chairman of the Federal Reserve, said in the recent interview. He agrees that the economy’s situation is uncertain and that there is a high risk of inflation.

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For those who are unfamiliar with the Federal Reserve, the Federal Reserve is the United States’ central bank. Like RBI in India.

The question is, will it have any impact on us? Yes, The fundamental foundation of all interest rates throughout the world is the US fed rate, It is used by India and other developing economies. When the US Federal Reserve raises interest rates, all central banks across the world usually follow it.

A Big Hit in Borrowing Costs.

The increase in interest rate will have an impact on mortgage loans and all other types of borrowing.

Let’s say an Indian company has taken a floating rate loan from a global commercial bank and now has to pay extra interest as a result of the interest rise.

In mortgage loans, they are offered in both fixed and floating-rate loans. There isn’t much to be concerned about with a fixed rate because the interest is fixed for the duration of the loan. But, when interest rates rise, floating-rate mortgages become more expensive. This will also lower demand among individuals looking to buy a home, leading to lower sales for realtors.

Again, a car loan or any large expensive purchase will cost you extra due to an increase in interest rates.

Fewer mortgages, less car loans, less purchases of other durable goods, which indirectly slows the economic growth.

I mean, if economic conditions improve, the fed might lower the interest rate. Although no one knows how much the interest rate will be changed.

Also, as interest rates on borrowing will increase, interest rates on savings accounts and FD sorts will rise as well.

Lastly, thanks to covid, central banks all over the world were either slashing interest rates or printing money to pump the economy. There was easy availability of funds which helped to the bull market’s rally.

So, what do you think? Is the bull market likely to come to an end as a result of the Fed’s rate hike? Or do you think this bull run continues and will reach new highs?

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The inflated highs that our market touched meant it just need a little push. Now at these levels the rate hike fear, the escalating Russia - Ukraine affair, crude oil price rise all are likely to push the market down. Not to forget the fact that virus scare is still lingering. I don’t see much upside from here on the short term.

But India is a long term buy story. I don’t question that fact.

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There are lot of insights shared by our RBI Governor related to interest rates and Hikes:

In terms of Inflation , India is at very comfortable situation while US is in very Critical as Inflation there is skyrocketing( highest in last 40 years) due to factors related to there land. Interest rates won’t be the biggest reason for any big fall in India though may impacted by global sentiments, but the LIC Ipo which will suck lot of liquidity ( > + 1 lac crore) , we may not see large upside . So its looking like a flat year with ups and down as we saw big rise in last two year so it should consolidate.

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Well written paper.

I saw various video of RBI monetary policy. They seem to be on a different tangent altogether. According to RBI, they not only maintained the status quo but said that the full year inflation will be in the region of 4.5% or so. So going by his statement, there seem to be no increase in Interest Rate in the Indian Market.

Most experts were surprised by the decision as every other Corporate were talking about input cost increasing etc which eventually result in increase in prices.

I am no one to doubt RBI’s decision as they have the best of minds and I am sure they know what is best.

The impact of Fed Reserve hike will be, FII, they will continue to sell and exit and this might have an impact. One expert was saying that DII and Retail has played a very import part in the current context that despite FII selling, the correction has not been so deep due to DII and Retail participation.

Hence my view is this year will be an year of consolidation.

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Most bull markets and trend changes are based on traders sentiment. Currently there are enough people in S& P 500 all short. The IG client sentiment index shows that well. The central banks have done enough QE to purchase assets and raise their prices. Untill that sentiment changes I don’t think the bull market will end.

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To look from a broader scale, the profitability of the companies also see a decline when the rates are hiked as the economy somewhat struggles. Higher interest rates most of the time are not favorable to the stock markets as the growth rate of the major corps slow down. With the hike in rates, along with the other geopolitical tensions, I believe that the bull market cannot sustain much, for now.

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Who is ready to hear the 3 beautiful words coming soon from fed?

Delay in Rate Hike :grinning:

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Not me….

I want rates to increase so fd rates increase too……

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Yes. The rates are too low in India. FD interest has suffered too much. Hikes would also help my parents’ fund flow.

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Yes, I wish the FD rates go up a bit. I have a few FD’s with IndusInd bank at 7% which will be maturing in a couple of months, Hoping to be able to redeploy at good rates :face_with_hand_over_mouth:

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The highest is rbl bank at 6.50 for three years
Next is 6.25 from idfc and db for 5 years
Yes bank gives 6.25 upto 10 years

Among small finance banks I have seen rates upto 6.90 (ujjivan i think)

I was expecting rates to increase in this monetary policy but did not happen.

One colleague of mine was saying after the lic ipo almost 1 lack cr of liquidity would be drained out and this might lead to banks increasing the rates

Disc. Do check the respective bank websites for any-change in rates.

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The Federal Reserve increased interest rates by 0.25%.

“We expect high inflation this year” say’s Jerome Powell.

Inflation will remains high through the end of the year due to the invasion of Ukraine, supply chain concerns, and high oil prices.

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For those who missed, this thread explains about the key highlights from the FOMC policy and market reaction to it

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Federal reserve is signaling a pause in rate hikes

But, looking at the worries that US have right now with banking sector especially smaller banks being in extreme stress, I think we will also see rate cuts sooner than later. My guess - in next 3 months.

What do you think?

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Federal reserve printed a lot of money to tide over the covid crisis. So they may still not be ready to cut rates.

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they may print more now to pay off debt as they are running out of cash.

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Very much on the cards

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Raising rates is to slow down the issue of credit (loans). Commercial banks can only get currency printed against loans. If new loans are reducing, the printing will reduce.

I am yet to check on the possibility that the FED prints money to service own debt requirement.

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the us government itself is running out of cash they say. so brrrrr go the machine.