How does rising US Fed rates affect the stock market?

The US Federal Reserve's chief Jerome Powell earlier this week raised alarm across equity markets as the US central bank looks to further hike interest rates to keep runaway inflation under control. 

Equity market participants were of the opinion that most of the interest rate hikes are behind with central bank hiking interest rates to its highest since 2008 at 4%.  

The US Federal Reserve's interest rate hikes are a highly watched event in the financial world, as they have significant impacts on the US economy, including the stock market and equity sectors. 

Why US central bank to keep interest rates higher?

Interest rates refer to the cost of borrowing money from a bank or other financial institution. The Federal Reserve is responsible for setting the interest rates in the US. When the economy is growing, and inflation is rising, the Federal Reserve raises interest rates to slow down economic growth and prevent inflation from getting out of control. 

On the other hand, when the economy is in recession or experiencing slow growth, the Federal Reserve lowers interest rates to encourage borrowing and investment, which stimulates economic growth.

Interest rates are adjusted through the Federal Open Market Committee (FOMC) meetings, which are held eight times a year. During these meetings, the FOMC reviews economic data and decides whether to raise, lower, or keep interest rates unchanged.

The US economy faced soaring inflation trouble as the coronavirus pandemic led to high supply disruptions across the globe, pushing prices higher. In order to control this soaring inflation, the central bank hiked interest rates continuously to calm inflation pressure. However, due to the constant rise of rates, recession fears began to crop up which has led equity markets to drop.  

How Interest Rate Hikes Affect the Stock Market?

When interest rates are increased, borrowing money becomes more expensive. This can have a negative impact on the stock market as it becomes more expensive for companies to borrow money to expand their operations or invest in new projects. As a result, companies may experience a decline in profits, which can cause a sell-off in their stocks.

Additionally, when interest rates rise, investors may shift their investments from the stock market to bonds or other fixed-income securities, which become more attractive due to the higher interest rates. This can lead to a decline in the stock market as investors sell off their stocks.

However, it's important to note that the stock market doesn't always decline when interest rates are raised. In some cases, when the Federal Reserve raises interest rates, it signals that the economy is strong and growing, which can be positive for the stock market. Additionally, some sectors, such as financials, may benefit from higher interest rates as they can charge more for loans.

Implications of high interest rates on US Equity Sectors

Different sectors of the stock market can be impacted differently by interest rate hikes. Here are a few examples:

Financials: Financial institutions, such as banks and insurance companies, typically benefit from rising interest rates as they can charge more for loans and earn higher returns on their investments.

Utilities: Utility companies are typically negatively impacted by rising interest rates as they require a lot of borrowing to fund their operations. As interest rates rise, their borrowing costs increase, which can impact their profitability.

Technology: Technology companies are often negatively impacted by rising interest rates as investors may shift their investments to bonds or other fixed-income securities, which become more attractive due to the higher interest rates.

Real Estate: Rising interest rates can negatively impact the real estate sector as it can make it more expensive for people to borrow money to buy homes or commercial properties.

Implications of high interest rates on US equity indexes

The Nasdaq 100 index, which tracks the top 100 technology companies in the US dropped 2.5% this week itself. They ended 2022 lower by 33% due to pressure from rising interest rates. 

In summary, interest rate hikes by the Federal Reserve can have significant impacts on the stock market and equity sectors. While rising interest rates can cause a decline in the stock market, the impact can vary across sectors. As an investor, it's important to keep an eye on interest rate hikes and how they may impact the sectors in which you have investments.

This is not investment advice. Investments in the securities market are subject to market risk, read all the related documents carefully before investing. Past performance is not indicative of future returns.