Thread by @optionurol

The @federalreserve is talking of hiking interest rates and end their quantitative easing (QE) policy to halt rising inflation. A Thread 🧵 to understand what it means.

#macroeconomics #investing #economy

@JustPunforfun @564pankaj @CNBCTV18News @bloombergquint @EconomicTimes

With inflation currently around 7%(USA) and 6,95%(India), businesses and consumers are feeling the pinch.
The Fed’s actions are designed to reduce the inflation rate to a more comfortable 2.00%-3.00% (USA).
@RBI expects India to be down to 5.7% for this financial Year.
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To accomplish this, the Fed / Central Banks will raise its Federal Funds rate. The Federal Funds rate is the rate at which banks can borrow and lend from each other so they can continue to provide loans to businesses and individuals.
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They will also end their policy of QE. QE is a monetary policy that allows the Central Bank to purchase long-term securities from the open market. The policy increases the amount of money in the money supply, encourages lending and investment, and lowers interest rates.
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By raising interest rates and ending quantitative easing, the Fed hopes to reduce the amount of the money in the money supply and bring inflation rates down to more comfortable levels.
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Impact of rising interest rates on your investments?
Bond prices typically move in the opposite direction of interest rates, meaning rising interest rates generally cause formerly issued bond prices to fall. The value of old bonds decreases when interest rates increase.
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Indian investors do not track the bond market aggressively. We Only look at it from a point of view of how it will affect Equity Market.
Although less predictable, stocks also tend to move in a negative direction when the Fed increases interest rates.
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(image from @DailyFX )

Large corporations, now must borrow money at a higher rate —> more money must be allocated to paying back the loan(s) —> profits to shrink.
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Consumers are borrowing at higher rates. They have to allocate more toward paying back loans and have less discretionary income to spend.Less spending means less revenue and profits for businesses.
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If companies are seen as cutting back on their growth due to less borrowing or are less profitable because of higher debt expenses or less revenue, the stock price will often drop.
If many companies experience these declines, the whole market, or key indexes will go down.
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How to Mitigate this Risk ?

Owning a mix of Debt mutual funds along with diversification into gold as a hedge and International Diversification & some minimal amount in crypto currency --> best way to reduce the equity shock
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RT and Like if you learnt from it.