The Federal interest rate is inter-bank loan rate AKA overnight rate, is the cost that ‘credit unions, savings institutions and commercial banks‘ are charged for borrowing money from Federal Reserve banks. It does not directly affect the stock market itself but it becomes more expensive for banks to borrow money from the Feds, but ripple effects are unstoppable, because financial institutions often pass the to their customers to borrow money
We know, that a rate hike will shake the market. What we don’t know is how long will last. It’s a signal of the end of the era of ‘cheap money’
Effects on individuals:Individuals are affected through increases to credit card and mortgage interest rates, especially if these loans carry a variable interest rate. This has the effect of decreasing the a disposable income. This means that people will spend less discretionary money, which will affect businesses’ top and bottom lines (that is, revenues and profits).
Effects on Companies:When the banks pass the rate hike to customers then companies might not borrow as much and will pay higher rates of interest on their loans. “Less business spending” can slow down the growth of a company; it might curtail expansion plans and new ventures and even induce cutbacks. There might be a decrease in earnings, usually means the stock price takes a hit.
Rate hikes and recessions history
|Rate-hike cycle||Duration||Next recession||Next recession|
U.S. dollar will appreciate against other currencies, that is good for importers but bad for exporters, so the balance of trade worsens as exports decrease and imports increase.