Another interest rate hike by US Federal Reserve - and some more hawkish words

3 Nov 2022 , 08:35 AM

US Federal Reserve again raised interest rate by 75 basis points, yesterday. This brings the benchmark lending rate in United States to between 3.75% and 4%. This is the highest level of benchmark lending rate seen in United States, since 2008. During his speech, announcing the interest rate hike, Federal Reserve Chairman, Jerome Powell, gave some confusing signals. First he said that the Federal Reserve was aware of the negative impact of its interest rate hikes on economic growth. Then he added that it is still too premature to pause the interest rate hikes. Then he added that the scale of interest rate hikes will be much higher than previously estimated. These confusing signals ultimately spooked the US equity markets. Dow Jones fell by 1.55%. Nasdaq fell by 3.36%. NYSE fell by 1.98%. S&P 500 fell by 2.5%.

This increase in interest rate and the indication of more interest rate hikes in future has considerably increased the probability of a prolonged and painful global economic recession. That is why US equity markets reacted so negatively to it. Indian equity markets are also going to react negatively today to this hike. 

This increase in interest rate has greatly increased the probability of a crash in US housing market. This is because the cost of mortgage loans is going to go up further after this hike. This will increase defaults and foreclosures on home mortgage loans in US. Consequently, more houses will come up in the market for sale. At the same, time demand for new mortgage loans will go down because of higher mortgage interest costs. The combination may prove to be deadly for the US housing market. Already, home prices in US have started falling at the fastest pace since 2006. In places like San Francisco, house prices are down by more than 8%. A crash in US housing market caused the 2008 global economic crisis.

Central Banks of other countries will have to increase their interest rates in response to the hike by US Federal Reserve. They will have to do this in order to prevent or mitigate the depreciation in their currencies against US dollar. This will result in worsening of global economic slowdown. US dollar is likelly to appreciate further against currencies such as Rupee. This may put further upward pressure on inflation in countries that are dependent on imports for meeting their energy needs, such as India.