How much impact will the Fed raise interest rates for the fourth time since March this year have on China？

[Global Times reporter Ni Hao] "In the face of the most severe inflationary pressure in 40 years, 12 members of the Federal Reserve voted unanimously for the first time to raise interest rates by 75 points for the second time in the year." Bloomberg reported on the 27th that the Fed’s interest rate meeting on the same day decided to raise interest rates by 75 basis points, raising the target range of the federal funds interest rate to 2.25%-2.5%. This makes the cumulative interest rate hike from June to July reach 150 basis points. The Federal Reserve has raised interest rates four times since March this year, with a cumulative rate increase of 225 basis points during the year. According to The Wall Street Journal, this is the most radical rate hike by the Federal Reserve since the 1980s. The rate of four interest rate hikes during the year has been equivalent to the rate hike between 2015 and 2018, and the federal funds rate has thus recovered to the level of three years ago. The initial value of the annualized rate of real GDP in the second quarter of this year announced by the United States on the 28th was -0.9%, which recorded a negative value for the second consecutive quarter and entered a "technical recession". The Wall Street Journal said that persistent high inflation and high interest rates are causing the US economy to shrink and consumer sentiment is being hit.

After the announcement of the interest rate hike decision, the three major stock indexes of US stocks rose sharply, among which the Nasdaq index rose by more than 4%, the biggest one-day increase since 2020. Gold rose significantly, the yield of two-year US bonds rebounded in the short term, approaching 3.07%, and the US dollar index fell. The analysis believes that the rate hike is in line with market expectations. At the press conference after the interest rate meeting, Federal Reserve Chairman Powell said that "the pace of interest rate hike may be slowed down in the future", instead of giving clear guidance to the next rate hike as in the past, it depends on the performance of major economic data. This has cooled the market’s expectations for future interest rate hikes.

Powell also said at the press conference that the current inflation rate in the United States is still far above the target level, and the task of the Federal Reserve is to deal with overall inflation. At the same time, he denied that the US economy was in recession, stressing that the US labor market is very strong and demand is still strong, and the US economy is still on the growth track this year. The latest data shows that the inflation situation in the United States is still difficult to ease. In June, the inflation rate of 9.1% was the highest in 41 years.

Bloomberg reported that investors are now concerned about whether the Fed will slow down the rate hike at its next meeting in September, and whether the pressure of rising US prices in the future will force the Fed to continue to raise interest rates with extraordinary strength. The Wall Street Journal said that the extent to which the Fed will eventually raise interest rates will depend on how consumers and businesses react when monetary policy tightens.

Before and after the Fed raised interest rates this time, many central banks around the world adjusted their interest rate policies. The European Central Bank took the lead in raising interest rates by 50 basis points to rob the Federal Reserve, and the Bank of Canada unexpectedly raised interest rates by 100 basis points. Most Gulf countries also chose to raise interest rates to varying degrees. The Hong Kong Monetary Authority followed the Federal Reserve and raised the benchmark interest rate by 75 basis points.

What is the impact of the Fed’s interest rate hike on A shares and RMB? Wu Chaoming, vice president of Caixin Securities Research Institute, told the Global Times on the 28th that the impact of the Fed’s interest rate hike on A shares is expected to be limited. First, the Fed’s interest rate hike is in line with market expectations and has been digested by the market. Second, according to the guidance of the Fed’s interest rate hike path after the meeting, its interest rate hike will slow down in the future with a high probability, which will weaken its impact on the domestic market; Third, China’s policy easing continues, and the economic fundamentals continue to improve, and A-shares have a certain resilience. The Fed’s interest rate hike cannot dominate the trend of A-shares.

In terms of the impact on the RMB exchange rate, Wu Chaoming believes that although the Fed’s interest rate hike will still make the interest rate difference between China and the United States in the upside down stage for some time to come, and the capital flow will cause some disturbance to the exchange rate, the main factor that dominates the RMB exchange rate is the relative changes in the economic fundamentals of the two countries. In the future, under the background that China’s economic margin is improving and the downward pressure on the US economy is increasing, RMB assets are attractive and the RMB exchange rate is supported, so the impact of the Fed’s interest rate hike on the exchange rate is limited.