Why did the Fed raise its benchmark interest rate by 25 basis points?

The U.S. Federal Reserve concluded its two-day monetary policy meeting and announced an increase in the target range of the federal funds rate by 25 basis points to between 5% and 5.25%. The following editor will explain why the Federal Reserve raised the benchmark interest rate by 25 basis points. Let’s take a look.

Let's take a look, I hope it can be used as a reference.

What does it mean to raise interest rates by 25 basis points in the United States? When used in interest rate changes, one basis point is 0.01%, so 25 basis points is 0.25%.

Therefore, the Fed's 25 basis point interest rate hike means that the U.S. Federal Reserve decided to raise the federal funds target interest rate by 25 basis points after convening a meeting.

Take March 23, 2023 as an example: At 2 a.m., the Federal Reserve announced that it would raise the target range of the federal funds rate by 25 basis points from 4.5%-4.75% to 4.75%-5%. This is the Federal Reserve's first consecutive increase since March last year.

It has raised interest rates nine times, and it is also the second consecutive time that the rate hike has slowed to 25 basis points.

The interest rate increase applies to both deposits and loans.

Interest rate hike is just a general term. Generally, when the central bank announces an interest rate increase, it will state in the document whether it will increase deposit interest or loan interest or both together. Therefore, the specific details depend on the document announcement, and the increase ratio will also be displayed in the announcement.

Raising interest rates generally has a negative impact on the stock market.

Increase deposit interest: Deposits are risk-free, so increasing deposit interest will make people more willing to withdraw funds from the financial market and deposit them in banks.

Increase loan interest: An increase in loan interest means an increase in the cost of financing for businesses or residents, so they are unwilling to borrow money, thereby blocking the money supply from the source.

The main purpose of raising interest rates is to curb inflation. The "goods" here refer to currency, not "money", which means there is a surplus of RMB in the market. Therefore, while prices rise, money becomes increasingly devalued.

Therefore, interest rate hike funds flow back to banks, which can reduce the amount of money in circulation.

However, our country has hardly raised interest rates in recent years. Instead, it has adjusted the quantity of money in circulation through reverse repurchases.

Will raising interest rates be a good thing or a bad thing for bank stocks? Raising interest rates means that a lot of money will flow back to banks, and the main source of income for banks is the interest difference between deposits and loans. Raising interest rates means increasing deposit interest and loan interest. Generally, the interest difference between deposits and loans will expand.

, so it will increase the bank’s income.

Therefore, it is good for bank stocks, but the good news does not mean that the stock price will rise.

Raising interest rates is bad for the financial market, and the economy affects the whole economy. When the whole market is bad, bank stocks will not perform very well.

Raising interest rates means increasing deposit interest and increasing loan interest.

After raising deposit interest rates, people are more willing to deposit funds in banks, while after loan interest rates increase, companies' financing costs increase.

Therefore, interest rates are generally raised to curb inflation.

After interest rates are raised, the amount of money in circulation decreases, and the stock market is related to increasing volume and price. If there is no incremental funds, the stock market will fall.

In recent years, our central bank has rarely raised interest rates. Instead, the United States has continued to raise interest rates. Interest rate hikes are negative for A-shares. Moreover, U.S. bond interest rates continue to rise after interest rate increases, which also have many negative factors for A-shares.

Raising interest rates has put the brakes on the U.S. economy, and the banking crisis is still ongoing. The latest data from the U.S. Department of Labor shows that the consumer price index (CPI) rose 5% year-on-year in March this year, down from the previous value, but still higher than

The Fed's 2% target.

While raising interest rates to curb inflation, the U.S. economy also hit the "brakes."

Data recently released by the U.S. Department of Commerce showed that U.S. real GDP grew by 1.1% on an annual basis in the first quarter of this year, significantly lower than the 2.6% growth in the fourth quarter of last year and lower than market expectations.

At the same time, the U.S. banking crisis continues to ferment. This week, First Bank and Bank of America became the third bank to fail in two months.

The market expects that the Federal Reserve may start cutting interest rates as early as September. The market is currently paying close attention to when the Federal Reserve will turn to monetary easing.

CME Group's "Fed Watch" tool shows that after this 25 basis point increase, the Fed is expected to pause raising interest rates and then start cutting interest rates as early as September.