What is the nature of interest rate hikes?

The nature of the Fed's interest rate hike can be discussed from two aspects: one is for the United States itself, and the other is for other countries/regions or a certain industry.

For the United States itself, the essence of the Fed's interest rate hike is to develop the U.S. economy through monetary policy adjustments. In fact, no matter what the Fed does, its ultimate goal is to protect the development of the U.S. economy. It will do things that are beneficial to the development of the U.S. economy, and will not do things that are not beneficial to the development of the U.S. economy, unless it is forced to do so by something more serious.

When the Federal Reserve formulates specific policies, it mainly considers three things: GDP growth and fiscal deficit, inflation rate and unemployment rate, and economic cycle. The motivation of the Federal Reserve to raise interest rates can be basically inferred by analyzing these three aspects, but it should be noted that these three aspects will be given different weights according to different seasons. After all, many times, formulating monetary policies to achieve a certain goal is a matter of having your cake and eating it too. It should be especially mentioned that although the Federal Reserve focuses on these three aspects, the most important ones to guard against are GDP and fiscal deficit. If they cannot be guarded, it will not be a simple economic recession, but the collapse of the United States.

For other countries/regions or certain industries, the nature of the Fed's interest rate hike may be much more complicated. Or to put it bluntly, based on the history of the Fed's interest rate hikes, the Fed's interest rate hikes may often turn into the United States' financial harvest of other countries/regions or certain industries. Regardless of whether this "harvest" is subjective, objectively, every round of Fed interest rate hikes in history will cause catastrophic consequences worldwide, and some regions or industries will even face a catastrophe.

The global financial crisis in 2008, the technology and Internet bubble at the beginning of this century, and the Southeast Asian financial crisis, the Japanese economic crisis and the Latin American debt crisis in the last century can all be said to have been largely reaped after the Federal Reserve's interest rate hikes at the time triggered internal conflicts and caused a collapse.

The background of this round of interest rate hikes by the Federal Reserve is: countries around the world, including the United States, are experiencing economic recession due to the epidemic, and the unlimited quantitative easing of "printing money" has temporarily stabilized the economy, but it has also caused serious hidden dangers.

In terms of the size of the U.S. federal government debt alone, it has exceeded the $30 trillion mark this year, just a stone's throw away from the current U.S. federal government debt ceiling of $31.4 trillion. On average, each American carries more than $90,000 in federal government debt. This figure is $7 trillion higher than the U.S. GDP in 2021 (about $23 trillion), and the debt size has increased by exactly $7 trillion in the two years since the outbreak of the COVID-19 pandemic.

The main reason for this situation is that since the outbreak of the epidemic, the Federal Reserve has printed trillions of dollars to maintain economic development. In 2020 alone, 21% of the total US dollars poured into the market, creating the largest "flooding" record in human history. When the Federal Reserve finally announced an accelerated reduction in bond purchases, that is, slowing down the pace of "printing money", its balance sheet size was nearly 9 trillion US dollars.

Of course, the Fed's massive money printing has indeed promoted the development of the US economy. Data released by the US Department of Commerce last month showed that the US economy grew by 5.7% in 2021, the highest since 1984, and the nominal growth was as high as 10.05%. The difference between this nominal growth and actual growth is mainly inflation. According to the latest data released by the US Department of Labor, the US CPI in January 2022 rose by 7.5% year-on-year, the highest increase since February 1982.

As a developed country, the United States has long entered an era of low growth. This is a globally recognized common sense. Now suddenly achieving a nominal growth of 10% is actually equivalent to an elderly person taking a lot of tonic medicine. The risks are imaginable.

It is precisely because of such a severe situation that the Fed is eager to speed up the reduction of bond purchases and keep leaking that it will start raising interest rates as soon as possible. But it is also because of the unprecedented severity that all countries and investors in the world are afraid of the Fed's interest rate hike, fearing that the storm brought by this interest rate hike will bring disaster to themselves.

To put it in an analogy, each round of interest rate hikes by the Federal Reserve is like the United States blowing the horn for hungry wolves to feed, releasing the hungry wolves to roam around the world. When they see weak or vulnerable prey, they will pounce on it and bite the prey to death to temporarily cure their own hunger and illness.

From the crises caused by the previous Fed rate hikes, we can see that the United States has used the status of the US dollar as an international currency to inflate bubbles time and time again, fatten up the "prey", and then raise interest rates to release the hungry wolf. The world is like raising a Gu, which needs more and more nutrients to nourish it, and every time the Fed raises interest rates, it is like a witch's horn, meaning a new round of "hunting" has begun.

Of course, from the current perspective, or from this year's perspective, there is no need to worry too much, because the first half of the Fed's interest rate hike is often not the most dangerous time, but when the layout is being made at all levels, and when all preparations are almost complete, the real risks will be exposed. As mentioned above, the interest rate hike is the final result. To ensure that this result is favorable, the United States must make preparations in other aspects before and in the early stages of the interest rate hike, which are in line with expectations, otherwise it will either be ineffective or easily get out of control.

This preparation time is also a precious buffer period for the crypto market and investors. Although we believe that the current crypto market is still in the early stage of rapid development, and the crypto market is inherently global, in the environment of the Fed's interest rate hike, the risk resistance is better than that of most investment markets. However, if this round of Fed rate hikes really causes a more terrible global storm than ever before, then now, before the lid is lifted, we need to be prepared to deal with it and formulate our own response strategies.