Fed rate hikes and what it means for the average Joe

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Recently, the Federal Reserve of the United States has announced an increase in their federal funds rate by 0.5%, which is the rate banks borrow from each other overnight, simply put. A few questions come to mind, why are they doing this and more importantly, how will this affect us?

The Fed is doing this as a monetary measure to try and curb the rising inflation (the highest it’s been since 1981) that has been creeping up recently, due to factors such as the Russian oil and gas embargo and Chinese supply chain disruptions due to lockdowns again. The increase in the federal funds rate will mean a higher cost of borrowing for banks, which will be passed down to us regular folks. They do this as an attempt to discourage people to borrow money and decrease the amount of money circulating in the economy. Overall, this means higher interest payments for loans, mortgages and your credit cards.

Photo by Emil Kalibradov on Unsplash

Besides higher borrowing costs, this rate hike has also caused stocks to plunge. If we take a look at the S&P500, it has plunged down roughly 4% since the announcement this week.

This can be attributed to many factors, mainly because when interest rates go up, this causes a ripple effect from the increased borrowing costs so there is less money to be spent overall. Less money available leads to a decrease in demand for products and services and thus a decrease in company earnings.

Now, considering that there are still 5 more FOMC meetings this year with a high likelihood of further rate hikes, you can start to see where things will go this year. As long as the Russian-Ukrainian conflict goes on and supply chain issues in China continue to persist, my view of the stock market is quite bleak.

As to how this will affect the Indonesian stock market, we will have to wait and see as the stock market has been closed due to Idul Fitri. I highly suspect our stock market will take a beating this coming week as US monetary policy has quite the effect on global markets.

Photo by Mark Basarab on Unsplash