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The Rate Hike & The Reaction

Last night as expected Federal Reserve Bank (Central Bank of USA) did its first rate hike since 2018. The importance of it is not in the timeline but the reason and the environment in it are being done.

Let's look at the reason it has been two years since the rate curs were executed due to the pandemic lockdown. During that period tsunami of liquidity created a large demand for anything and everything but the supply could not even match most of the time. This created inflation levels that surprised the theoretical world of finance and central banks. To fight this liquidity is being removed with the cost of borrowing rising.

Now let's look at the environment, since inflation has been highest in recent history the cost of living is taking a knock. There are now specific measures by governments to provide some relief to the cost of living. On the other side, the growth that was supported by liquidity is vanishing with the tightening itself.

This environmental risk was even mentioned by Fed Chairman yesterday and despite stagflation, rising rates with a reduction in balance sheet soon is a recipe of disaster.

But as they all say now in the speech demand destruction is important for inflation control. What if all of them are wrong and it results in a crisis like never before. Do not worry QE5 is already in the works, ask the bond market.

India and China are in a good position as the central banks and governments are not over panicking as thee inflation is because of supply issues and demand hampering will worsen for the long run.


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