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

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 Russias 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 Chinas 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.