Well, the Fed has announced that they will put an end to the bond purchase plan of the US government by March-end next year. But this is not the only big decision that the Fed has taken. It has also said that they are going to increase the base rate seven times in the next three years. And not only this, they are going to increase the rates three times in 2022 itself. Each time they will increase the rates by 25 basis points which basically means that the rate of interest in the US is going to increase by 1.75% in the next three years.
The Fed increasing the interest rates means that the investors will now look to invest in low-risk investment instruments like fixed deposits. For this, they will look to exit from the stock markets of the developing nations and divert their wealth towards relatively low-risk instruments. And mind you, the US investors have their money parked in all the major stock markets across the globe especially that of the developing nations like India. This may trigger a huge sell-off in all the major stock market exchanges all around the world.
So let’s understand how this will affect the common man?
One more effect of the Fed’s announcement of raising the base rate will be that the central banks of the developing nations which in our case is the Reserve Bank of India may do the same thing and start raising interest rates in their respective countries. This may make loans costly and a shift of wealth towards the relatively safer investment instruments.
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