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1. What is the Fed's interest rate hike?
In fact, the Fed's interest rate hike and interest rate cut are both cyclical shearing processes of the US dollar, reflecting the changes in market interest rates.
If the Fed wants to lower the market interest rate, it will buy dollar bonds through primary dealers and put dollars into the market. If there are more dollars in the market, the interest rate will fall.
On the other hand, if the Fed wants to enter the interest rate hike cycle, it will sell a large number of government bonds to the market and recover the dollars in the market. However, if the dollar liquidity in the market decreases, it will become scarce and the market interest rate will rise.
If the Fed wants to lower or raise short-term market interest rates, it will buy or sell short-term dollar bonds, and if it wants to lower or raise medium-and long-term interest rates, it will buy or sell medium-and long-term dollar bonds.
From the monetary point of view, the Fed raises interest rates in order to recover the liquidity of the US dollar, make the US dollar scarce and valuable, make the US dollar more valuable and increase purchasing power. At the same time, the dollar index will start to strengthen and rise.
2. What will happen if the Fed raises interest rates?
The US dollar is the world currency, which dominates the global financial and monetary system and trade settlement system. This means that the Fed's interest rate hike will not only have an impact on the US economy, but also have different impacts on other economies in the world.
Third, the consequences of the Fed's interest rate hike on the US economy.
From the perspective of financial markets, the Fed's interest rate hike means that the liquidity of the US dollar is reduced, which leads to the strengthening of the US dollar index, the scarcity of US dollar assets and the decline of the value of the US dollar.
In the process of raising interest rates, the Fed needs to sell US debt to recover US dollars. This process means that the number of government bonds in the market will increase, the price of US dollar government bonds will fall, and the yield of US bonds will start to rise.
For the US stock market, the Fed's interest rate hike is equivalent to recovering the dollar liquidity in the market and increasing the cost of dollar financing. This will affect the liquidity of the US stock market, and the three major stock indexes of the US stock market will dive.
In the later period, with the return of capital brought by the US dollar interest rate hike, the liquidity of overseas markets and the returned US dollars will lead to the rebound of US stocks, while the cheap US dollars and debt bubbles that flowed into the US stock market at the beginning of the interest rate cut cycle and pushed up the US stock price will be digested, and the US financial market will also solve the debt risks and asset bubbles, thus achieving a smooth transition.
From the perspective of the economic cycle, when the US economy returns to stability and full employment, the Fed will enter the interest rate hike cycle. After raising interest rates, attracting a large amount of capital back will also promote the growth of American real economy and the expansion of production capacity. Finally, it can not only digest inflation, but also maintain the medium-and long-term recovery and growth of the American real economy.
Fourth, the consequences of the Fed's interest rate hike on other emerging economies in the world.
The Fed cut interest rates in order to release risks to other economies around the world, so when the Fed enters the interest rate hike cycle, it will also have an impact on other economies around the world.
From the perspective of international capital flows, the Fed's interest rate hike will lead to a large amount of capital flight from emerging economies. The capital originally flowing into emerging economies will turn to the American market, pursuing higher interest returns and financial assets investment returns, which will bring great impact to the global financial market.
However, most emerging economies rely on the dollar hegemonic system and support the free convertibility of the dollar. Once the Fed raises interest rates, there will be a large amount of capital outflow, which will impact their financial stability and cause liquidity shortage.