1. Economic growth is hindered:
1. Reduced corporate investment: A high interest rate environment will increase corporate borrowing costs, causing companies to be more cautious when considering new investment projects. For example, companies that originally planned to expand factories and purchase new equipment may postpone or cancel these investment plans due to rising capital costs, thereby affecting the expansion of corporate production scale and technological updates, and further weakening the overall economic growth momentum.
2. Weak consumer demand: In a high-interest environment, consumers' loan costs, such as mortgages, car loans, and credit card debts, will increase, resulting in a decrease in consumer disposable income, which in turn inhibits consumer willingness to consume. For example, some households may reduce non-essential consumer spending such as purchasing large items and traveling due to rising mortgage rates. The decline in consumer demand will have an adverse impact on economic growth because consumption is an important part of the economy.
2. Financial market turmoil:
1. Stock market under pressure: Failure to cut interest rates may lead to poor stock market performance. High interest rates will increase investors' expected return on the stock market, and corporate profit growth may be limited in a high interest rate environment, which will reduce the attractiveness of stocks. In addition, some investors may transfer funds from the stock market to fixed income products such as bonds with relatively stable returns, resulting in capital outflows from the stock market and falling stock prices. For example, in the past Fed's interest rate hike cycle, the stock market tended to experience a certain degree of volatility and adjustment.
2. Increased volatility in the bond market: Changes in interest rates have a direct impact on the bond market. If interest rates are not cut, bond yields may remain at a high level or even rise further. This will cause the prices of issued bonds to fall, because bond prices and yields have an inverse relationship. For investors and financial institutions holding a large number of bonds, the value of their assets will shrink. At the same time, the cost of issuing new bonds will also increase, affecting the ability and willingness of companies and governments to raise funds through the bond market.
