I have been tortured by the market recently. Investment should not only pay attention to the fundamentals of the stock itself, but also the various policies of the Federal Reserve. The Federal Reserve's interest rate meeting is usually held at 2 o'clock in the evening. Many friends around me stayed up late to listen to the meeting at the end of last month. After listening, they immediately sent it to the group: a 50 basis point interest rate hike is in line with market expectations and is good news!

I was ashamed for not staying up late to listen. Then yesterday, the CPI data came out again, and Ethereum performed a good show of drawing doors. I couldn't help but fall into deep thought, do you need to know so much to trade a coin? So today I went to study carefully what is an interest rate hike.

In order to understand the interest rate hike, we need to first understand a term: interest rate.

The interest rate can be simply understood as the time cost of money. For example, if a bank offers a 5% interest rate for both loans and deposits for one year, it means that if you deposit 1 million yuan, you can get back 1.05 million yuan after one year.

If you borrow 1 million yuan from a bank, the total amount you need to repay is 1.05 million yuan.

Since the interest rate is the time cost of money, when the interest rate is lower, the time value of the funds that can be generated by the depositor will be lower. Because the time cost is low, the value that can be generated by lending money to others is lower; correspondingly, it will be more beneficial to the borrower because the time cost he needs to pay for the funds is lower.

For example, if the bank lowers the interest rate to 0, most people will not choose to keep their money in the bank, but rather keep it in Yu'ebao and earn interest. More people will borrow money from the bank for investment or consumption, which will promote further economic prosperity.

As savings decrease and consumption and investment increase, this will cause inflation, which is why interest rates need to be raised, in order to curb inflation.

Next, let's talk about interest rate hikes. The Fed's interest rate hikes do not directly increase the bank's loan interest rates. There is a difference. The Fed's interest rate hikes increase something called the overnight lending rate. Let's use the example above of paying a 5% interest rate for borrowing from a bank. This 5% is composed of three parts: 3% risk-free rate + 1.8% risk premium + 0.2% bank margin (the value will fluctuate)

The 1.8% risk premium is calculated based on the borrower's financial status, social situation and other factors, and is added to the bank's internal calculation formula to give a value.

The bank interest rate of 0.2% is the interest rate given by different banks based on the market competition situation and the bank’s own situation.

The 3% risk-free interest rate is the key point. What is a risk-free interest rate? It means that the borrower is bound to be able to repay the money. Such entities are generally central banks of various countries, especially those of major countries.

Because the country will issue treasury bonds, everyone will buy them only if they believe that the country can deliver the promised interest and principal of the treasury bonds in the future.

Treasury bonds are also divided into 1-year, 3-year, 10-year, etc. This interest rate can be deduced from the price of treasury bonds. Therefore, the future interest rate is not a fixed value, but a price curve. The interest rate deduced from treasury bonds of different maturities is distributed according to time.

As mentioned above, the Fed's interest rate hikes increase the overnight lending rate. In other words, the Fed's interest rate hikes have little impact on 1-year Treasury bonds, 3-year Treasury bonds, and 5-year Treasury bonds. What it affects is the interest rate of the next day (the risk-free interest rate of the next day).

After understanding these, I found that raising interest rates is just a means to curb inflation, which will bring about the expectation of economic recession in a short period of time. However, there are many factors that affect the financial market, and raising interest rates is just one of them. Whether to raise interest rates or how many basis points to raise interest rates can only help us understand the current economic situation and the determination of the Federal Reserve. It is still a bit unrealistic to rely on the data of interest rate hikes to make money or not lose money.

It is better to go to bed as usual during the Federal Reserve’s interest rate decision-making meetings in the future. After all, staying up late is not good for your health.

Of course, there are also measures such as quantitative easing (QE) and balance sheet reduction, but we will talk about these next time.

That's all, Dyor.

Author: Beyond, Twitter @Beyond0x009; Editor: Gemini, Twitter @Gemini0x17