The Impact of the Federal Funds Rate Hike on Chinese and U.S. Financial Markets

Research Article
Open access

The Impact of the Federal Funds Rate Hike on Chinese and U.S. Financial Markets

Yixun Kang 1*
  • 1 UC Santa Barbara    
  • *corresponding author yixun@ucsb.edu
Published on 13 September 2023 | https://doi.org/10.54254/2754-1169/19/20230156
AEMPS Vol.19
ISSN (Print): 2754-1177
ISSN (Online): 2754-1169
ISBN (Print): 978-1-915371-81-2
ISBN (Online): 978-1-915371-82-9

Abstract

On March 16th, 2022, federal funds benchmark rate was increased by 25 basis points, to the range of 0.25% to 0.50%, by the U.S. Federal Reserve (Fed) , after seeing Russia’s war on Ukraine as a potential risk producing higher inflation and decreasing both national and international economic activities. The first increase in federal funds rates since 2018 was followed by the immense increase in rate. Until November 2022, the Fed has raised the federal funds rate seven times, leading impacts on many fields, including the financial markets in both U.S. and China. This paper selects two well-known financial indexes, representing the market performance of both China’s stock market and U.S. stock market. Since the exchange rate is highly sensitive to interest rates. After the raise in the benchmark of federal funds rate, U.S. dollar has appreciated, and Chinese Yuan has depreciated. This paper introduced the exchange rate as the media to reflect the impact on the Chinese stock market by federal funds rate hikes. After intercepting the stock data from 2 years after the Great Depression till one month before the first federal funds rate hike, this paper constructs ARIMA model to analyze the impact on each stock market by federal funds rate hike, and forecast their further performances, providing suggestions to investigators in the U.S. and China.

Keywords:

China, U.S., federal reserve, federal funds rate, stock market, ARIMA

Kang,Y. (2023). The Impact of the Federal Funds Rate Hike on Chinese and U.S. Financial Markets. Advances in Economics, Management and Political Sciences,19,325-332.
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References

[1]. Jeff Cox. (2022) Fed raises interest rates half a point to highest level in 15 years. https://www.cnbc.com/2022/12/14/fed-rate-decision-december-2022.html

[2]. Federal Reserve. (2022) Policy Tools. https://www.federalreserve.gov/monetarypolicy/openmarket.htm

[3]. N. T. Laopodis. (2006) Dynamic Interactions among the Stock Market, Federal Funds Rate, Inflation and Economic Activity. The Financial Review, Vol. 41, No. 4: 513-545

[4]. McKinnon, R. Ian (2007) The US current account deficits and the dollar standard’s sustainability: A monetary approach, CESifo Forum, ISSN 2190-717X, ifo Institut für Wirtschaftsforschung an der Universität München, München, Vol. 08, Iss. 4, pp. 12-23

[5]. M. Chai. (2014) “Treasury Secretary Effect” in Yen/Yuan-Dollar Exchange Rate Policy? http://aacs.ccny.cuny.edu/2014conference/Papers/Minqi%20Chai.pdf

[6]. M. Friedman. (1961) The Lag in Effect of Monetary Policy. Journal of Political Economy, Vol. 69, No. 5: 447-466

[7]. A. Kontonikas, R. MacDonald, A. Saggu. Stock market reaction to fed funds rate surprises: State dependence and the financial crisis. Journal of Banking & Finance, Vol. 37, No. 11: 4025-4037

[8]. Casey Quinlan. (2022) The Fed raises interest rates again, signals more coming despite pressure to slow the pace. https://indianacapitalchronicle.com/2022/11/02/the-fed-raises-interest-rates-again-signals-more-coming-despite-pressure-to-slow-the-pace/

[9]. N. K. Kishor, H. A. Marfatia. (2013) The time-varying response of foreign stock markets to U.S. monetary policy surprises: Evidence from the Federal funds futures market. Journal of International Financial Markets, Institutions and Money, Vol. 24, No. C: 1-24

[10]. Yahoo finance. https://finance.yahoo.com/?guccounter=1

[11]. Fxtop. https://fxtop.com/en/historical-exchange-rates.php?MA=1&YA=0&C1=USD&C2=CNY&A=1&DD1=01&MM1=01&YYYY1=2010&DD2=31&MM2=11&YYYY2=2022&LARGE=1&LANG=en&MM1Y=0&PRINT=1&CJ=0&TR=

Cite this article

Kang,Y. (2023). The Impact of the Federal Funds Rate Hike on Chinese and U.S. Financial Markets. Advances in Economics, Management and Political Sciences,19,325-332.

Data availability

The datasets used and/or analyzed during the current study will be available from the authors upon reasonable request.

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About volume

Volume title: Proceedings of the 2023 International Conference on Management Research and Economic Development

ISBN：978-1-915371-81-2(Print) / 978-1-915371-82-9(Online)
Editor：Javier Cifuentes-Faura, Canh Thien Dang
Conference website: https://2023.icmred.org/
Conference date: 28 April 2023
Series: Advances in Economics, Management and Political Sciences
Volume number: Vol.19
ISSN：2754-1169(Print) / 2754-1177(Online)

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References

[1]. Jeff Cox. (2022) Fed raises interest rates half a point to highest level in 15 years. https://www.cnbc.com/2022/12/14/fed-rate-decision-december-2022.html

[2]. Federal Reserve. (2022) Policy Tools. https://www.federalreserve.gov/monetarypolicy/openmarket.htm

[3]. N. T. Laopodis. (2006) Dynamic Interactions among the Stock Market, Federal Funds Rate, Inflation and Economic Activity. The Financial Review, Vol. 41, No. 4: 513-545

[4]. McKinnon, R. Ian (2007) The US current account deficits and the dollar standard’s sustainability: A monetary approach, CESifo Forum, ISSN 2190-717X, ifo Institut für Wirtschaftsforschung an der Universität München, München, Vol. 08, Iss. 4, pp. 12-23

[5]. M. Chai. (2014) “Treasury Secretary Effect” in Yen/Yuan-Dollar Exchange Rate Policy? http://aacs.ccny.cuny.edu/2014conference/Papers/Minqi%20Chai.pdf

[6]. M. Friedman. (1961) The Lag in Effect of Monetary Policy. Journal of Political Economy, Vol. 69, No. 5: 447-466

[7]. A. Kontonikas, R. MacDonald, A. Saggu. Stock market reaction to fed funds rate surprises: State dependence and the financial crisis. Journal of Banking & Finance, Vol. 37, No. 11: 4025-4037

[8]. Casey Quinlan. (2022) The Fed raises interest rates again, signals more coming despite pressure to slow the pace. https://indianacapitalchronicle.com/2022/11/02/the-fed-raises-interest-rates-again-signals-more-coming-despite-pressure-to-slow-the-pace/

[9]. N. K. Kishor, H. A. Marfatia. (2013) The time-varying response of foreign stock markets to U.S. monetary policy surprises: Evidence from the Federal funds futures market. Journal of International Financial Markets, Institutions and Money, Vol. 24, No. C: 1-24

[10]. Yahoo finance. https://finance.yahoo.com/?guccounter=1

[11]. Fxtop. https://fxtop.com/en/historical-exchange-rates.php?MA=1&YA=0&C1=USD&C2=CNY&A=1&DD1=01&MM1=01&YYYY1=2010&DD2=31&MM2=11&YYYY2=2022&LARGE=1&LANG=en&MM1Y=0&PRINT=1&CJ=0&TR=

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