Rate Hikes Research Articles

Analyzing the Spillover Effect of Fed Rate Hikes and Cross-Border Capital Flows Risk using SVAR Model

In March 2023, the collapse of Silicon Valley Bank in the United States was considered the largest bank failure since the 2008 financial crisis. Behind this event, the catalyst for the collapse of Silicon Valley Bank was also the Federal Reserve's interest rate hike. Under the current impact of the Federal Reserve's tightening cycle, it not only caused systemic financial risks on a global scale, but also significantly increased cross-border capital flow risks and uncertainties in exchange rate fluctuations. With the increasing openness of China's financial sector, the continuous interest rate hikes by the Federal Reserve have exerted greater pressure on the renminbi exchange rate and cross-border capital flows. This article analyzes the spillover effects of the Federal Reserve's interest rate hikes, systematically studies their impact on cross-border capital flows, exchange rates, and asset prices, and summarizes practical pathways and feasible experiences for effectively reducing economic volatility and financial risks. The research findings will provide valuable references for domestic enterprises and policymakers in managing systemic financial risks and promoting high-level development of the Chinese economy.

The Impact of Fed Rate Hikes on The Chinese Economy

The United States is the world's largest economy and a major financial center. As the central bank of the United States, the Federal Reserve's monetary policy decisions not only have a significant impact on the country's economic and trade development, but also lead to changes in global capital flows, exchange rate fluctuations, and international trade conditions. Since March 2022, persistent high inflation and overheating of the economy have led the Federal Reserve to raise interest rates dozens of times. As of September 2023, the Federal Reserve's interest rate has increased from 0 to 5.5%. The total rate hike by the Federal Reserve has reached 550 basis points. As the US dollar is the world's reserve currency, China's economy inevitably experiences varying degrees of impact. Therefore, studying the impact of the Federal Reserve's rate hikes on the Chinese economy will help our country formulate better response measures and reduce its adverse effects on our economy.

Financial Performance Assessment of Flat Buildings Using Life Cycle Cost and Cost–Benefit Analysis

Buildings resulting from construction projects are durable assets and decisions related to construction projects have enduring impacts. In many cases, building owners prioritize only the initial costs, such as building design, construction, and equipment costs, while neglecting the future operation and maintenance costs. This research studies life cycle costing (LCC) analysis to evaluate the financial feasibility of urban housing. The LCC calculates all the costs incurred and benefits during the building's operation. The cost is generated from construction, operational, and maintenance costs. At the same time, the benefit breaks down into flat rental costs, retail rental costs, and parking costs. The costs incurred are estimated over 25 years, and the parameters of feasibility are net Present Value (NPV), Benefit-Cost Ratio (BCR), and Internal Rate of Return (IRR). The study generates negative NPV, BCR < 1, and 0.61% of IRR. It indicates that the project is not feasible. This research gives alternatives to make the project feasible. This study employed a trial-and-error approach to ascertain the viability of investing in flat rentals by systematically adjusting rental rates. Incremental adjustments to rental rates are tested by a series of rate hikes of 50%, 100%, 150%, and 200% using a trial-and-error approach. The project will become feasible if the flat rate increases to 150-200% of the initial rental rate.

The ECB's Solution to the Inflation Caused by the Russia-Ukraine Conflict

Abstract: The Russian-Ukrainian War saw a major escalation on February 24, 2022, when Russia invaded Ukraine, sparking the biggest battle in Europe since World War II. In addition to negatively affecting international relations, this lengthy conflict has had a significant negative influence on world markets, especially those in the Eurozone. The ongoing conflict has intensified inflationary pressures, necessitating the implementation of strong fiscal and monetary measures by the European Central Bank (ECB). This study analyzes the inflationary effect of the Russia-Ukraine crisis on the economies of the Eurozone and assesses the ECB's policies using macroeconomic models, such as the IS-PC-MR model. It explores the complex economic fallout, which includes unstable energy supply, higher industrial prices, and a decline in consumer confidence. The economy has stabilized largely because of the ECB's initiatives, which have included coordinated fiscal policies, interest rate hikes and asset purchase adjustments. Despite these initiatives, problems still exist, such as controlling the growing public debt and striking a balance between inflation management and economic growth. In order to strengthen economic resilience, the conclusion highlights the need for ongoing adaptation and international cooperation. Investments in integrated fiscal measures, diverse supply chains, and renewable energy are suggested as being crucial for long-term stability. The purpose of this study is to provide insights for future economic crisis management and to contribute to policy-making conversations.

Structured factor copulas for modeling the systemic risk of European and United States banks

In this paper, we employ Credit Default Swaps (CDS) to model the joint and conditional distress probabilities of banks in Europe and the U.S. using factor copulas. We propose multi-factor, structured factor, and factor-vine models where the banks in the sample are clustered according to their geographic location. We find that within each region, the co-dependence between banks is best described using both, systematic and idiosyncratic, financial contagion channels. However, if we consider the banking system as a whole, then the systematic contagion channel prevails, meaning that the distress probabilities are driven by a latent global factor and region-specific factors. In all cases, the co-dependence structure of bank CDS spreads is highly correlated in the tail. The out-of-sample forecasts of several measures of systemic risk allow us to identify the periods of distress in the banking sector over the recent years including the COVID-19 pandemic, the interest rate hikes in 2022, and the banking crisis in 2023.

A bank-level analysis of interest rate pass-through in South Africa

We study the pass-through of policy rate hikes and cuts to household and corporate lending and deposit interest rates in South Africa over the period January 2009 to December 2020. We show that rate hikes are typically passed through to mortgage interest rates completely while rate cuts are not. This asymmetry is more prevalent for household than corporate mortgages. Pass-through to household and corporate call deposit interest rates is typically complete, but cheque account interest rates are highly sticky and experience weak pass-through. Our results indicate that banks’ pass-through decisions often impose greater costs on households than firms, and may blunt the stimulatory effect of rate cuts by weakening their impact on debt servicing costs and the remuneration of deposit balances.

Impact of the Fed's Rate Hike Policy on the Prices of Commodities and Real Estate

The United States has experienced a long period of stubborn inflation since 2022, so the Federal Reserve began to raise interest rates in March 2022, which will cause asset price volatility and valuation changes. The purpose of this study is to explore the changes of some commodity and real estate prices under this background, and to put forward reasonable valuation forecast suggestions. This research mainly analyzes the price changes of crude oil, corn, and real estate under the background of the Fed's interest rate hike and analyzes the changes of asset prices by constructing the structure vector autoregressive (SVAR) model and the grid connectivity model. According to the analysis, the results show that the Fed can influence real asset prices through its monetary policy, and other factors inevitably interfere. The empirical data from March 2022 to March 2024 also show that with the Fed's multiple interest rate hikes, asset prices are affected by different degrees of decline.

Assessing the VlX's lmpact on SPY Returns in Response to the Federal Reserve's 2022 Rate Hike

This study examines the relationship between the CBOE Volatility Index (VIX) and the returns of the SPDR S&P 500 ETF (SPY) before and after the Federal Reserve's first interest rate hike in 2022. The analysis covers an eight-month period, centered on the date of interest rate changes. The reason to use this period because it is the first hike after the pandemic. A time series approach is used, constructing multi-linear regressions to evaluate the pre-hike and post-hike periods. The pre-hike model did not find any significant predictors, suggesting that market dynamics and the role of VIX were not aligned with SPY returns. However, after the interest rate hike, the VIX rate became significant indicators, reflecting the market's increased sensitivity due to the new interest rate environment. This transformation highlights the crucial role of the VIX as a gauge of market sentiment and risk perception in response to significant monetary policy actions.

Decoding the Yield Curve: Understanding its Significance in Economic Forecasting

Throughout history, the Romanian yield curve has assumed various shapes that correspond to differing economic conditions, representing market sentiment and anticipation of future economic activity and interest rates. In times of economic stability and growth, the yield curve has generally exhibited an upward slope, signifying investor trust in continued economic expansion and expectations of future interest rate hikes. In contrast, during periods of economic uncertainty or downturns, the yield curve has often flattened or turned negative. A flattening curve suggests uncertainty about future economic conditions, while an inverted curve, where short-term yields surpass long-term yields, indicates significant economic stress and has traditionally been an accurate predictor of forthcoming recessions. These fluctuations offer essential insights for policymakers and investors, helping in the understanding and anticipation of economic trends and in the effective management of financial risks.

Stock Return Prediction under US Federal Funds Rate Hike Based on Supervised Machine Learning

As US Federal Reverse Systems has continued to raise federal funds in the past few years in order to curb inflation, this has had a huge impact on chinese capital market. Investors and financial institude are actively engaged in predicting stock returns to maximize their investment income. This study constructs a model to analyze and predict the financial factor of stock income based on supervised machine learning methods and evaluate the results. The datasample is extracted from wind, for the period half a year before and after the recent federal funds rate hike. Utilizing machine learning packages in R, this paper construct models based on linear discriminant analysis, decision tree and random forest models. After constructing estimation models, this paper visualizes the prediction result by utilizing drawing package in R. It has been found that the random forest algorithm predicting model generates very successful results for the financial factor prediction as the model accuracy reaches 99%. According to the analysis, relevant model to predict financial factors and non-financial factors based on non-linear supervised machine learning algorithm can be built by investors or hedge fund agency to estimate stock performance in the future. This study also investigates the economic result of the Federal Funds Rate hikes, which is instructive for investors to make well-informed decisions.

Subsidizing a sports arena in a bankrupt city: Detroit's Little Caesars Arena

AbstractObjectivesThe potential for ancillary real estate transformation and downtown revitalization has moved to the forefront of sports venue subsidy arguments. Despite the City of Detroit being in the largest municipal bankruptcy in U.S. history at the time, $324 million in public funding was directly provided to Little Caesars Arena, a new home for the Detroit Red Wings hockey team. Using the Detroit context, this article examines how a major arena subsidy deal arose in a severely financially distressed city.MethodsUsing a snowball technique, documents were collected from government, media, industry, community, legal, and academic sources to inform a retrospective, single case study. Over 300 documents covering a period from 1992 to 2021 were then reviewed for prospective relevance. A review of secondary media sources was conducted in lieu of traditional interviews.ResultsThe arena funding outcome is best explained by three interrelated aspects: local growth coalitions, real estate development promises, and lacking procedural and financial transparency exacerbated by both the chosen funding mechanism of tax increment financing (TIF) and the bankruptcy.ConclusionsWhere flexible financial subsidies and arena deal making are concerned, procedural transparency matters. Growth coalitions and rent‐seeking team owners can use the earmarked nature of TIF to circumvent traditional budgetary processes and mute prospective opposition through promises of self‐financing subsidies that will not result in new tax rate hikes. For venue deals where the substance is in the details of contractual obligations, transparency and adequate time for scrutiny are especially important.

The Impact of the Latest Federal Reserve Interest Rate Hike on the Chinese Economy

This study utilizes weekly data from March 2022 to September 2023, employing the TVP-VAR model to empirically analyze the impact of the Federal Reserve's interest rate hikes on the Chinese economy. The results indicate that the Federal Reserve's rate hikes have exerted negative shocks on China's output, with the effects dissipating after 8 to 12 lags. China's monetary policy has shown a short-term inverse relationship with that of the United States, though the overall impact remains minimal. The rate hikes have suppressed China's fixed asset investments, with a gradually diminishing impact on GDP. Additionally, the rate hikes have negatively affected the RMB exchange rate and China's exports, with the rising USD/RMB exchange rate further restraining exports. The widening interest rate differential between the USD and RMB has impacted China's stock market, making international capital more inclined to invest in U.S. enterprises. To address these challenges, this paper recommends that China continue to implement a prudent monetary policy, advance RMB internationalization and exchange rate marketization reforms, enhance market liquidity, and improve the stock market and institutional frameworks to bolster economic stability and resilience. The findings provide theoretical foundations and feasible strategies for sustaining China's economic growth and mitigating external shocks.

The Impact of Geopolitical Conflict and Fed Rate Hikes on Asset Pricing

In the current context of weak economic recovery, ongoing Russia-Ukraine conflict, and consecutive interest rate hikes by the Federal Reserve, global financial and commodity markets have experienced intensified turbulence. To investigate the impact of the Russia-Ukraine conflict and the Federal Reserve interest rate hikes on asset pricing, this study first analyzed the U.S. stock market, bond market, and commodity market based on data from the CEIC database. From the comprehensive stock and year-on-year data after each round of interest rate hikes, it is evident that both the Russia-Ukraine conflict and the Federal Reserve interest rate hikes have had a significant negative impact on investors' financial assets. Additionally, due to the continuous interest rate hikes by the Federal Reserve, funds from the stock market have gradually shifted to the bond market. Furthermore, after analyzing the impact of the Russia-Ukraine conflict and the Federal Reserve interest rate hikes on the U.S. stock market, bond market, and commodity market, the study further explored the influence of these factors on asset pricing using the discounted cash flow (DCF) valuation model. Finally, the study provided an outlook on future market trends.

Economic Consequences of the Federal Reserve’s Interest Rate Hike: The Financial Market and Labor Market

Economic Consequences of the Federal Reserve’s Interest Rate Hike: The Financial Market and Labor Market

Exploration of the Reasons for the Federal Reserve’s Interest Rate Hike in 2022 and Evaluation of Policy Effectiveness

After the global economy experienced the impact of the new crown epidemic, the US economy recovered in 2022, but inflation rose rapidly, prompting the Federal Reserve (FED) to take interest rate hikes. This paper analyzes the background and reasons for the Fed’s interest rate hike in 2022, and evaluates its policy effect, aiming to provide experience and lessons for future monetary policymaking. The main findings include: that the interest rate hike significantly reduced the inflation rate in the United States, from 8.0% in the first quarter to 5.67% in the fourth quarter; In the short term, interest rate hikes will hinder the economy, but in the long term, they will help promote stable growth; The interest rate hike led to stock market fluctuations and bond market yields rising, the credit market tightening, and increased the instability of the global financial market; Urge other countries to adjust their monetary policies and increase global economic uncertainty. The significance of this paper is to expand the theory of international financial and monetary policy and provide comparative research value for the policy-making of emerging market countries and developing countries. The policy recommendations include: the United States should strengthen policy transparency and financial supervision to promote the optimization of economic structure; Other countries should strengthen macro policy coordination, improve financial regulatory capacity, achieve economic diversification, maintain monetary policy flexibility, and promote the healthy development of cross-border capital flows.

The Impact of the Federal Reserve’s Interest Rate Hikes on U.S. Inflation Rate

The Federal Reserve’s interest rate hikes have a significant impact on domestic economic activities and monetary policies in the United States. Since March 2022, the Federal Reserve has raised interest rates multiple times to counter domestic inflationary pressures. In this article, data on the U.S. inflation rate and the federal benchmark interest rate from January 2010 to March 2024 were extracted, and an ARIMA model was used for analysis to predict how the U.S. inflation rate will develop under the condition of interest rate hikes. The study found that after the Federal Reserve raised interest rates, the inflation rate in the United States also rose. The reasons for this situation may be due to increased inflation expectations and external factors such as COVID-19. To mitigate risks brought by the rise in inflation, such as asset devaluation, commodity price volatility, and reduced investment returns, investors can adopt strategies like diversifying their investments, closely monitoring the Federal Reserve’s interest rate hikes, and avoiding high-leverage investments.

Risk Assessment of Banks When Interest Rate Hikes

Interest rates play a crucial role in the risk management of banks. When central banks raise interest rates to curb inflation or an overheated economy, the risk profile of banks can alter significantly. This paper explores the risks banks face and their assessment methods in a rising interest rate environment, focusing on SVB and Credit Suisse as case studies. It identifies key risks such as liquidity risk, credit risk, market risk, and systemic risk by examining the impact of increasing interest rates on banks' balance sheets, earnings, and capital positions. The research concludes that Asset-Liability Management (ALM) modeling, stress testing, and hedging strategies are effective tools for banks to manage these risks. A thorough literature review underscores the importance of these strategies in ensuring banks' stability and performance amidst rising interest rates. The paper highlights that proper risk management practices are essential for banks to navigate the challenges posed by changing interest rates and to maintain their financial health and operational stability in such an environment.

Corporate taxation in Spain: analyzing efficiency and revenue potential

This paper offers a comprehensive analysis of Spain’s corporate tax system through the lens of the Laffer curve and Buoyancy index, assessing its efficiency in generating revenue. The study finds that Spain is nearing the Laffer curve’s optimal tax rate, beyond which tax revenue may decrease with rate hikes. The Buoyancy index reveals a fluctuating response of tax revenues to economic shifts, indicating vulnerability in economic downturns. We trace Spain’s corporate tax evolution, examining current structures and recent policy reforms, and explore how corporate taxation influences economic activities and investment. The paper proposes policy recommendations, including reassessing the corporate tax rate, advocating structural reforms for a wider tax base, and policies promoting economic growth. Emphasis is placed on counter-cyclical fiscal policies, regular evaluation of tax incentives, improving tax compliance, and Spain’s role in global tax coordination. This research contributes to fiscal policy discussions, advocating a balanced tax approach for sustainable economic development and guiding policymakers toward resilient fiscal strategies in a dynamic economic environment.

Do firm expectations respond to monetary policy announcements?

This paper investigates whether UK firms’ price growth expectations respond to the Bank of England (BoE) monetary policy announcements and explores the underlying mechanism. Using microdata from the UK Decision Maker Panel survey, we isolate the exogenous component of the monetary policy decisions by comparing firms’ responses filed before and after BoE announcements. Guided by a model of dispersed information, our analysis suggests that firms respond to monetary policy announcements but are, overall, not as informed and sophisticated as financial market participants. Firms’ price expectations respond to actual interest rate changes, as well as to bank rate changes purged from their systematic component, but not to high-frequency surprises. The left tail of their expected price change distribution is particularly sensitive to monetary policy announcements. Furthermore, we unveil significant non-linear effects, with changes in interest rates of 50 basis points being mostly responsible for revisions in expectations. This implies that the recent tightening cycle was effective in shifting firms’ expectations primarily at its peak when a sequence of consecutive large rate hikes was implemented. We also show that UK news coverage of the BoE’s activities increases following policy rate changes, highlighting the media’s crucial role in shaping public expectations.

Lessons from the Collapse of Silicon Valley Bank

The Federal Reserve's consecutive interest rate hikes led to a decline in the prices of US Treasuries and mortgage-backed securities (MBS), which comprised a significant portion of Silicon Valley Bank (SVB)'s asset portfolio. As a result, SVB experienced substantial floating losses, exceeding its owner's equity, creating immense pressure on its assets and liabilities. The analysis also highlights the simple deposit and asset structures of SVB, with a high proportion of demand deposits and a significant allocation to bonds. The aggressive interest rate hikes by the Federal Reserve, coupled with financing difficulties for startups, accelerated deposit consumption and intensified debt pressure for SVB. Furthermore, the article reveals the low coverage rate of deposit insurance, particularly at SVB, where only 7% of deposits are insured. This adds to the vulnerability of SVB and its depositors. In conclusion, this article examines SVB's balance sheet and interest rate risk exposure, identifies shortcomings in the management supervision system, and provides three reflections on the financial event.