With the interest rate increased another quarter point few days ago by US Fed, US market was surprisingly muted. Looking at recent economic data, such as accelerated consumer’s spending, labor market robust, Powell has even said rate increase policy in the past became obsolete. They are going to speed up the rate increases into 2 more times before the end of this year. However, Powell also said the committee did not take current global trade disputes into consideration. It will come only after relevant data has been released.
As such, Fed’s action solely based on data being released one step at a time. Its action would most probably be lagging. Market movement is always ahead of policy makers’ decision. Investors are more prompt to react earlier than those policy makers.
Significant of Interest Rate Increases
In the past, purchasing power is one of the main factors to push product prices to increase due to the market law of demand and supply. Inflation rate increases signify that purchasers possess plentiful supply of cash. The more consumer goods and products they buy, the higher the prices will become. When consumer products’ prices go up, livelihood of the general public may be greatly affected. That’s the need to slow down public spending in order to control the inflation rate. That’s where the increase of interest rate comes in significantly. Increase interest rate will curb consumers’ spending. High bank interest rate will encourage more saving than spending.
However, the new economic phenomena where we are going to witness might turn out very differently. The issue of trade war era we are entering from now on will bring us into entirely different scenario.
It is common sense to understand that once import tariff increases, product sale prices in the imported country market will increase accordingly. This phenomena will be translated into inflation rate increases. Instead of consumers’ spending that cause prices to go up, now it is the import tax hike that causes market price to increase.
Fed’s Interest Rate Decision Factor
While the Fed has been looking at the inflation data to determine how much or how fast they are going to increase interest rate for all these while, but inflation rate has been stubbornly low. If import tax hike has been implemented on a wider scale, inflation rate will increase substantially. This time around, the Fed will have to increase interest rate at a faster rate. Consequentially, market liquidity will be tightened up at a faster rate. This is where economy recession will be looming at the corner.
US has started to increase import tax hike for steel and aluminum since the beginning of this year and it is inevitably going to affect prices of US end products eventually. Currently it is the turn from other countries, like Canada, European countries and China just to mention a few, are planning to retaliate US by increasing import tariff from US products. Trump has threatened more tariff will be implemented if other countries retaliate his move. The escalation chain effect will have no doubt in the card.
Right now, trade war has just begun to take shape in the global scenario. The impact however is not immediate but gradual. It will take a longer developmental horizon. But stock market indexes will drop first and economic data as a proof will come later. But the truth be at the ultimate eventuality, an indication of global economic recession.
So, investors should stay vigilant from now on and be better prepared ahead of time.
Thank you for reading this article! Please do your own research and make your own investment decision wisely!
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The view and opinion expressed are personal views of the author and are subject to change based on market and other conditions. This write up does not constitute sole advice for investment decision. Investors are advised to do further reading and research to make up individual investment decision.