USA Federal Rate Hike - How is it Going to impact the Market?

USA Federal Rate Hike - How is it Going to impact the Market?

1. The coming December Federal Open Market Committee meeting is said to be a critical event on global market, with hints from their recent meeting that the FOMC has a strong desire to increase the interest rate in December.

2. Many people has reduced their exposure in the stock market, to keep themselves out of this uncertainty. China economy growth is seen slowing, from double digit growth to single digit (let's assume all their economic data report are 100% reliable, despite the president Xi himself has earlier mentioned that the numbers could be distorted to meet the targets set).

3. The US unemployment rate has dropped to 5% in October report, and the inflation has firmed up too. It is seen as the United States economy has gotten herself ready for the rate adjustment. To study the impact of the rate hike, we will have to identify the motive of the rate hike.

4. After the sub-prime crisis, the united states has undergone 3 QEs and the interest rate was near 0%, to stimulate the recovery of the economy. Traditionally, a country increases the interest rate when the economy is running too hot, as a cooling measure to prevent asset bubble. However, this round, the united state economy is not booming that wildly that it really needs a rate hike. In fact, the interested is planned to be increased gradually so that the united states has the margin to "stimulate the economy" by reducing the interest rate if economy outlook goes unfavorable.

5. It is believe that the FOMC has faced a lot of dilemma in deciding whether to increase the rate or not, that's why the decision has been postponed several round. The employment data, CPI, and inflation numbers are just part of the factors they take into consideration when making decision for the rate. Most importantly, the necessity of rate adjustment rely fully on the readiness of the market to absorb the shock and whether the companies and consumer are prepared to cope with the monetary tightening. Increasing the interest rate at average-performing economy to find room for future rate cut when economy turn bad, could be a bad idea. The move that was suppose to prepare for unfavorable time, could in turn cause the feared scenario to happen.



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