From CNBC · Lee Ying Shan · · 2m
How Fed rate hikes shake global markets
When the U.S. Federal Reserve tightens policy, the effects ripple worldwide through currencies, bond yields, and stock valuations.
In brief
When the U.S. Federal Reserve tightens policy, the effects ripple worldwide through currencies, bond yields, and stock valuations. Fed rate hikes strengthen the dollar and raise global bond yields, forcing other central banks to respond while pressuring emerging market currencies and equity valuations. Originally…
Fed raises rates for first time since 2023
The Federal Reserve hiked interest rates on Wednesday and signaled another increase could follow, responding to inflation driven partly by rising oil prices.
Stronger dollar pressures other currencies
Higher U.S. rates support the dollar while weakening other currencies, since oil, natural gas, and agricultural commodities are priced in dollars. This creates stress for economies tied to U.S. rates.
Japan faces pressure to raise rates too
A weaker yen could push the Bank of Japan to tighten policy in response. Currency weakness forces central banks to raise rates to defend their currencies, even if domestic conditions don't warrant it.
“It does put pressure on Japan to continue to follow suit and raise interest rates as well.”
Other central banks already tightening
The European Central Bank raised rates by 25 basis points last week, and the Bank of Japan is expected to increase rates by a quarter point this week. Major developed economies are moving in sync on tightening.
Asia faces divergent inflation pressures
China and Thailand face deflation while Australia and Japan have above-target inflation. India sits near its target. These different conditions mean central banks may not mechanically follow the Fed despite dollar pressure.
Higher yields hit stock valuations
Rising Treasury yields make bonds more attractive than stocks and increase companies' borrowing costs. This reduces the present value investors assign to future earnings, pressuring equity valuations.
Speed of yield rise matters most
An orderly rise in yields toward 5 percent is manageable for markets, but a disorderly spike would create bigger problems. The pace of change matters more than the absolute level for equity digestion.
“I think if the yield move were to start to get disorderly, then I think you have a bigger digestion problem for the equity market.”
Strong U.S. growth supports global demand
The resilient U.S. economy that allows the Fed to tighten also supports demand for exports and corporate activity globally. Higher rates create near-term pressure but strong growth should spur trade and fundamentals elsewhere.
The big picture
Fed rate hikes strengthen the dollar and raise global bond yields, forcing other central banks to respond while pressuring emerging market currencies and equity valuations.
