How Fed rate affect Economy, Inflation and Indian Stock Market? What happens when the Fed increases interest rates? Trending Talks

Ever wonder How Fed rates affect the economy of the country? or How Fed rate affect inflation? or How Fed rate affect the Indian Stock Market? 

In this article, we will be discussing about some important points relating to the Fed rate and answers to the above-mentioned questions that too in layman's language so that it could be easily understood by a common man.

Before that, we must know What is Fed rate?

The term Fed rate refers to the target interest rate set by the Federal Open Market Committee (FOMC). This target is the rate at which banks borrow and advances the loan to each other. The FOMC, which is the policymaking body of the Fed Reserve System, meets eight times annually to set the target interest rate, which is part of its financing policy.

Now, after we understood what is fed rate, let us dive deep into the crux of this article i.e What happens when the Fed increases interest rates? Below is the effect in chronological order:

1. When the US hike the Fed Interest Rate (Fed rate hike), it ultimately leads to the uprise in the interest of US 10-year Government securities.
2. With an increase in the interest of Government securities, the Interest of consumer loans in the US goes up and as a result, the Demand for loans decreases in the US.
3. With the decrease in demand for loans, Consumption will go down as a result of which GDP will slow down.
4. The same coupling impact will follow in other countries as well. (Global slowdown/Recession)
5. To remain attractive in the world the emerging economies will raise their respective Interest rates. This rise in interest rates will slow down their economies.
6. These slowing economies will have a negative impact on Corporate Profitability.
7. This negative impact on corporate profits will result in lower profit growth and can turn into a Price correction or Time correction in the Stock market.

 Now in case, Fed decreases interest the rates vice-versa effect will follow in the world economy.

Hope this article helped you understand how Fed rate changes affect different countries and their stock market.