What's next, Fed?

The US stock market rebounded on Thursday after the awful Wednesday. On Wednesday, the Dow industries tumbled more than 600 points, and the fall wiped out the gain of the US stock market in 2018. Today's US stock market surged for the most of the day.

If the Fed decides to stick to its rate hike, it can affect the US stock market significantly negatively. First, the 2007 Subprime Crisis could be thought to be started by the Fed's decision of rate hike, which made many debtors less capable of paying back their loans. At the moment, there are many companies which took the advantage of cheap interest rates and have very high leverage ratios, causing a worrying systematic risk. Secondly, the Federal Reserve has influence over the world financial market, since the US economy is the dominating economy in the world. When the Fed sends a signal of calming down the US stock market, it can cause a spillover effect that brings down the world financial market. Thirdly, the Fed has a conflicted with the US government. The US president, Donald Trump, always want to have more stimulating policies. He has cut taxes and provided subsidies to stimulate the US economy, which cause a historically high budget deficit. While the US Fed wants to raise rates and calm down the economy, this would erase the positive effect of the stimulus policies made by Trump. Therefore, the Fed will not achieve what it wants and the US government will not get the full effect of its expansionary fiscal policies, this is a loss-loss situation.

Overall, the US Fed has to re-consider its plan of rate hikes, especially given the increasing worry among the US financial market.