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In the early morning of September 27, the Federal Reserve raised interest rates as expected, raising the interest rate by 25 basis points to the range of 2%~2.25%, becoming the 8th interest rate hike since the United States started the gradual interest rate hike process, and the interest rate level hit a new high since 2008. So, what impact will the Federal Reserve's interest rate hike have on the currency market?

Interest rate hike

First, let's understand interest and interest rate hike.

Lending is renting

Zhang San deposits money in the bank, which is equivalent to lending money to the bank; Li Si borrows money from the bank, which is equivalent to the bank lending money to Li Si.

The essence of lending is to maintain the ownership of funds, but transfer the right to use the funds to the lender. Zhang San lends money to Li Si, and the money is still Zhang San's, but Li Si can control how to use the money. Just like the landlord still owns the house and rents it to people to live in.

Therefore, the essence of the lending relationship is a leasing behavior.

Interest is rent

Increasing interest rates means raising interest rates. And what is the interest rate?

Obviously, when renting, the lessee pays rent to the lessee. When borrowing, it is equivalent to the borrower renting money to the lender, and of course the lender has to pay rent.

Obviously, interest is the rent of funds.

An interest rate hike means that the price of money has increased.

So an interest rate hike means raising the interest rate, which means that the rent of money has increased. To put it bluntly, the price of money has increased. Originally, we could use funds by paying 1.5% "rent", but now we have to pay 2.5% "rent" to use funds.

Use of money

What will happen if the price of money increases?

Let's put it this way, no matter who you are, we have only three uses for earning money:

First, consumption, buying food, drinks, entertainment, and fun... Use it and exchange it for what we need. This is out of our current needs.

Second, savings, saving it, and using it in the future when there are accidents or other needs, this is out of our future needs. This is a safety motive.

Third, investment, investment in financial assets, investment in other industries are all considered investment, this is also out of our future needs. This is a profit motive.

Consumption reduction

Now, the interest rate has increased and the price of money has increased. Money is not the same price as before, it has become more expensive. So, it is more cost-effective for us to save or invest.

Savings increase

On the other hand, the interest on saving money has also increased, so it is better to save.

Production slows down

For producers, most companies will take out loans, which is determined by the financial leverage effect (borrowing 1 yuan, interest 0.1 yuan, and can recover 1.2 yuan through organizing production, operation and sales). However, after the interest rate increase, the loan interest will also increase, so companies will reduce loans.

As a result, production will also slow down to a certain extent. Moreover, consumption has been reduced, and so many things are still produced, some of which will not be sold, so production must be reduced.

Investment changes

In terms of investment, due to the increase in interest rates, the money obtained from the sale of financial assets is either saved or loaned out. Whether it is saved or loaned, the interest will increase. Therefore, the yield of financial products will also increase. Therefore, investment in financial products will increase.

However, due to the reduction in consumption, real investment will also decrease to a certain extent.

Consumption decreases, production decreases, savings and financial investment increase, and industrial investment decreases. This is the change in the use of money after the interest rate hike. Of course, these changes are overall changes. Due to changes in social and cultural concepts and popular demand, individual industries will counterattack, which is not surprising.

Impact of interest rate hikes on the currency market?

After talking for a long time, I finally got to the point. What is the impact of interest rate hikes on the currency market?

Digital currency is a financial asset, and its liquidity is not symbiotic with the US dollar. As interest rates rise, investment in financial assets will increase. Among those who reduce consumption to invest, some people may invest in digital currency.

But some people believe that some people will sell digital currency to invest in traditional financial products, because the yield of traditional financial products will increase with the increase in interest rates. Therefore, it is believed that the Fed's interest rate hike will lead to a decrease in the total amount of the digital currency market.

However, statistics from relevant parties:

First, many people who hold digital currency have been locked up, and now is not a good time to sell.

Second, people who invest in digital currency are risk-takers. Therefore, few people will sell coins to invest in financial assets.

Therefore, the impact of the Fed’s interest rate hike on the currency market should be minimal.