Research on the Impact of Fed Rate Hike on China's Macro-economy

Abstract

Considering the dominance of the United States Dollar and the background of the global weak economy hindered by covid-19 as well as the tangled geopolitics, it is essential to analyze how the fed’ announcements affect the world. This article explores how the key macroeconomic indicators changed before and after the fed rate hikes and look into the mechanisms behind it. The result shows that global liquidity does not see a rapid change; commodities prices do exist a negative correlation with the U.S. interest rates, explained by the holding cost of inventories. In terms of the effect on China, the short-term cross-border capital outflow is positively related to the China-US spread; meanwhile, currency devaluation is happening. China’s response to such shocks is not consistent with the idea that other worlds outside the U.S. need to increase the interest rate to keep pace with the fed reserve announcement. Rather, the People's Bank of China decreases its one-year loan prime rate from 3.70 to 3.65 percent in August 2022. To prevent capital outflows and currency devaluation, capital control takes place. On August 27, 2022, Jay Powell, the chair of the US Federal Reserve, declared that taming the surging inflation was the priority despite the cost for households and businesses. It is expected that the fed reserve will continue its tight monetary policy, so emerging economies like China should be prepared for it.