The Federal Reserve is the largest participant in the interbank lending market in the United States, and its financing will account for a large proportion of other financial institutions. Therefore, after the Fed raises the interbank lending market interest rate, on the one hand, the borrowing cost of the Fed will rise, and the financing interest rate provided by financial institutions will also rise. On the other hand, financial institutions will raise deposit interest rates to attract deposits and increase currency reserves.
For the US stock market, after the deposit interest rate is raised, investors are willing to deposit funds in banks, which will reduce the circulation of US dollars. However, after the loan interest rate increases, it will make it difficult for enterprises to raise funds, resulting in a decrease in cash flow, so the funds flowing into the stock market will decrease. The stock market needs capital to promote. The reduction of funds and the lack of kinetic energy in the stock market will lead to a decline in stock prices, so it is bad. A serious interest rate hike may cause the US stock market to plummet. The United States is at the center of the global economy. When US stocks fall, domestic A-shares tend to follow suit.
After the opening of Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect in China, the proportion of foreign investment in the A-share market has greatly increased, and the proportion of Chinese investment in markets other than A-shares has also increased. After the Fed raises interest rates, the deposit interest rate in the United States will rise, which may lead to the outflow of A-share funds from the United States, and the lack of momentum in the stock market will lead to a decline in the stock price.
The Fed's interest rate hike will also cause the US dollar to appreciate and the RMB to depreciate against the US dollar. If China does not raise interest rates accordingly, RMB assets will become unattractive. At this time, foreign investors may sell their A shares to increase their holdings of US dollar assets. Moreover, the depreciation of RMB is unfavorable to industries that need to import raw materials and have high foreign debts. Especially for foreign trade enterprises, RMB depreciation means spending more money on raw materials, and the cost of some imported enterprises will increase accordingly, which is not conducive to the trend of stock prices.
Generally speaking, the Fed's interest rate hike is bad for the stock market.