5 questions and easy answers - Why the Fed rate hike is feared

The Federal Reserve (FOMC) meet takes centrestage as the US Central Bank is set to change the course of it's rate and money policy and everyone from Wall Street to Dalal Street is standing by guessing what is coming. Here is what you need to know-:


What has the Fed really said about rate hikes

The Fed chief all but announced that the US Central Bank will hike rates in March and set the stage for a hike in all the meetings for the year (7 in total) and did not negate the possibility of a 50 bps hike.


How is my life affected if the loan rates in the US go up?

It raises the cost of money directly in the United States but has a ripple effect on how much 'free or low cost' capital is available to fuel the markets. To put it simply the cheaper it is to get money the more risk one is willing to take with it be in the markets or in businesses. When loans are cheap, that encourages people, businesses, and investors to spend money, which stimulates the economy and thus also the stock exchange. Though not necessarily in that order.

If it is so helpful for businesses and economy why not just keep the Fed rates low?

Because the central bank has to not just keep the spenders in mind but also the savers. Low rates disincentivize saving and give rise to speculative or risky behaviour. Low rates leads to -> too much money which leads to the worth of the actual money being lesser or what finally shows up as inflation. Keeping rates low for too long can cause asset bubbles. And no-one likes a bubble because one time or another it has to burst.

Financial stocks I get, but why are tech stocks taking a knock?

Tech rally is fueled by low rates as the 'innovators' enjoy the low cost of capital to experiment and expand into businesses that may not give them returns immediately. So simply when the cost of capital is this low, it revs up funding for innovation and as rates go up investors expect tech companies to also slow down their innovation expansion.

So when can we expect this Fed rate hike finally?

Fed is likely to raise rates starting March and the market had anticipated 4 rate hikes this year the stage is set now for a lot more.