How will the US Federal Reserve raise interest rates affect the market?

One of the big questions on the minds of investors right now is whether the market will rise after the US Federal Reserve raises interest rates. This question is totally valid. It is a different matter that our past experience says that if interest rates rise in the US, stocks fall. Indian stock markets are under pressure after rising inflation in the US since the end of last year. So investors are worried now. In mid-January, this suspicion came true. After the Consumer Price Index rose 3% in 2021, the Federal Reserve has stated that it will take an aggressive approach to controlling interest rates. This is the first time since June 15 that retail inflation in the US has risen sharply. Investors feared that the US Federal Reserve could raise interest rates by up to 50 per cent as a precautionary measure. The Federal Reserve is also cutting government bonds and mortgage-based loans. The immediate effect of the move would be for investors to withdraw their money from risky stocks. If we look at what has happened in the past after the Federal Reserve raised interest rates, history has shown that the G700 index has returned an average of 5 per cent annually on 14 occasions with 120 interest rate hikes. Out of these, the market has seen a rise 11 times. Between mid-2009 and mid-2009, the Federal Reserve raised interest rates by 12 percent. Despite the rise in interest rates, S&P has risen to 5 per cent during the period. Between December 2016 and December 2020, interest rates have been raised nine times. In December 2016, S&P rose from the level of 1300 to 5,600 in December 2016. The index slipped when the trend of raising interest rates for three years came to an end. After the Federal Reserve cut interest rates in August 2016, the market rebounded and this trend continued till March 2020. After this, economic activities came to a standstill due to Kovid. Thus, it is clear that a market downturn is not necessary if the Federal Reserve raises interest rates. In general, the Federal Reserve starts raising rates when economic conditions are strong. Companies' profits also increase when the economy grows rapidly. If companies' profits go up, their stocks go up. In fact, stocks are not bound by our traditional thinking. As the economy continues to strengthen, companies' profits increase and their stocks rise faster. With this in mind, the Federal Reserve raises interest rates again and the trend continues. This sequence explains why share prices rise when interest rates rise. There is a strong correlation between economic growth rate and corporate profits.

Interestingly, on the same logic, the market may slide down once the upward trend in interest rates stops. We must not forget that the Federal Reserve raises interest rates to stem the tide of money flowing into the economy. If raising interest rates has a small effect on the economy, it will take time for the effects to show. If the Federal Reserve continues to raise rates or refuses to reduce them amid weak economic growth, then the stock will fall. Inflation is also on one side. If inflation stays high, the Federal Reserve will continue to raise interest rates. In March 1905, former Federal Reserve Chairman Paul Walker raised interest rates sharply. At that time, the inflation rate had reached 12.5 per cent.