US Fed Hikes Interest Rates: How Is It Going To Impact You?

On Wednesday, the Federal Reserve approved a fourth consecutive three-quarter point interest rate increase. It also signaled its approach on how it will go ahead with the monetary policy to bring inflation down. Let us look at the key highlights of the meeting, and what it means for the market and investors.

Federal Reserve Meeting Outcome

Before the meeting, the market anticipated a rate hike of 50 or 75 basis points. The central bank raised its short-term borrowing rate by 75 basis points to a target range of 3.75% to 4% - in line with estimates. It is the highest level since January 2008.

More than the rate hike, investors were interested to know the stance the Federal Reserve will take. Investors were looking for an indication from the Fed that it could be the last 75 basis point move by the central bank. The Fed has said that it will take into account the cumulative tightening of monetary policy, economic and financial developments, and the lags with which monetary policy affects economic activity and inflation.

Fed Chairman, Powell, dismissed the idea that the Fed may be pausing soon though he said he expects a discussion at the next meeting or two about slowing the pace of tightening.

Fed Rate Hike History 2022

(Source: Forbes.com)

(BPS means Basis Points. 1 Basis Point equals 1/100th of a percent or 0.01%)

Fed Rate Hike 2022: When will the Fed stop raising rates?

The terminal rate is the level at which the Fed is expected to stop raising interest rates. The Fed now expects the terminal rate to be higher than it was at their September meeting. With the higher rates, it is expected that the Fed will not be able to achieve the soft landing that it expected earlier.

Will the Fed Decrease the Pace of Rate Hikes?

Post the recently concluded meeting, experts believe that the rate hike will not halt anytime soon. Even if they do, the chances are minimal. Traders and investors are not hoping for a half-point increase in the next Fed's meeting in December rather than a three-quarter point increase. Current market pricing also indicates the Fed funds rate will top out near 5% before the rate hikes cease.

US Fed Hikes Interest Rates: What Should Investors Do?

Wall Street did not react positively post the rate hike announcement. The markets have fallen in the last two days. However, experts believe that once inflation starts coming down, we can see investors looking at equities again for investment. By H1 2023, we will have the rates declining and it will bring the Fed rate back to the neutral 2.25%-2.5%. Below is what investors investing in the US market need to do:

• Don't try to time the market - continue to SIP in quality stocks or index funds.
• Have a long-term investment horizon. You may not make profits in the short term.
• Avoid investing a lumpsum amount in the market as the bottom is difficult to predict, even for the best experts.

Fed Rate Hike 2022: Impact on US Market Investors

• A Fed rate hike implies higher borrowing costs for companies. In such a scenario, stocks that aren’t profitable get hit the most due to less availability of cash flows. 
• Growth stocks rely on the availability of capital to increase their operations, and higher interest rates essentially mean higher borrowing costs. This could affect their earnings as well. 
• On the other hand, stocks with good cash flows which do not rely on extra debt to finance operations benefit. Stocks in the essentials, consumer goods, and industrial sectors can be better placed during a rate hike. 
• In the case of bonds, investing in only high-quality AAA-rated bonds can be of help. Short-duration bonds are preferred over long-duration ones as they are less sensitive to interest rate changes. As a thumb rule, bond prices are inversely related to increases in interest rates. Hence, the price of short-duration bonds is less volatile compared to long-duration bonds. 

Fed Rate Hike: Impact on Indian Market Investors

• When the US Federal Reserve raises interest rates, it affects markets globally. Investors can expect even the RBI to increase interest rates in the near future which can affect several stocks which rely on capital for their growth. 
• Most importantly, a Fed rate hike increases the yields offered by the US Treasury Bills propelling Foreign Institutional Investors (FIIs) who had invested in the Indian markets to sell Indian equities in large numbers. This could further cause the share markets to fall. 
• Also, the Information Technology (IT) industry in India, which has a significant revenue share coming from the US, could get impacted negatively as companies in the US decrease their IT spending. 

Fed Rate Hike 2022: Impact of Fed Rate Hike on the Rupee

• A hike in interest rates in the US has a negative impact on the value of the rupee. 
• US Treasuries quote attractive yields which strengthen the demand for dollars as FIIs sell Indian equities to buy more of them. 
• The supply for the Indian rupee increases as FIIs turn net sellers eventually weakening the Indian rupee. Expect the USD-INR index to rise in the coming periods.

Take a look at how the markets behaved after the previous rate hikes here.

This is not an investment advisory. The blog is for information purposes only. Investments in the securities market are subject to market risks, read all the related documents carefully before investing. Past performance is not indicative of future returns. Please consider your specific investment requirements, risk tolerance, goal, time frame, risk and reward balance, and the cost associated with the investment before choosing a fund, or designing a portfolio that suits your needs. The performance and returns of any investment portfolio can neither be predicted nor guaranteed.