3 min read

Interest Rates; Diplomatic Tweets

Interest Rates; Diplomatic Tweets
Source: Statista

Interest Rates 101

A central focus this week - other than US stocks entering a bear market, was that the US Federal Reserve raised its benchmark interest rates by 0.75%. It was the biggest increase since 1994, and higher than expected.

What does this mean?

One of the Feds main goals is to keep prices stable, meaning low, stable inflation. Its main tool to tame inflation is interest rates. It does that by setting the short-term borrowing rate for commercial banks, who then pass rates along to consumers and businesses.

Raising interest rates slow down the economy, kind of like pushing the brakes on a gas pedal, in an attempt to get inflation under control.

So, borrowing becomes expensive, consumers and businesses hold off on making any investments, demand cools off, and (hopefully) prices are held down. In theory.

There are other things at play, such as supply chain issues which drive inflation, but central banks aren't able to control that.

As rates rise, businesses are not only affected by higher borrowing costs, they are also exposed to the adverse effects of deteriorating consumer demand. Both of these factors can weigh on earnings and stock prices.

It’s important to note however, that the empirical relationship between rates and stocks is more complicated than textbooks might imply. In the past, higher rates have been associated with higher, not lower stock prices.

In any economic and market environment, there are multiple factors at play. Now is no different.

The best hope for stocks right now is a recession that crushes inflation and allows the Fed to slow, stop or even reverse rate hikes.

The Fed has projected that interest rates will reach 3.4% by the end of 2022, which would be the highest level since 2008.

Hiking rates this hard will be painful for the economy and likely put some people out of work. But that’s the whole point, for people need to spend less so prices come back down to earth.

The US isn't an exception. Inflation has been affecting countries around the globe. In an analysis of 111 countries, Deutsche Bank found that the US’ inflation rate sits roughly in the middle.

Elsewhere, Swiss National Bank and the UK's central bank also increased their lending rates, and global shares took a deep dive as investors began dumping stocks based on more recession fears. Expect it to get worse before it gets better.

Diplomatic Tweets

Every now and then, mostly for amusement, I look at what Chinese officials around the world are tweeting. More often that not, I will discover the most random diplomat hurling insults at America in some kind of 'just-so-you-know/take-that' outburst.

Here are some recent tweets from various China government officials (they are often responded to with more devastating criticism):

  • Zhang Meifang is the Consul General of China in Belfast, UK:
  • Lijian Zhao is a Spokesperson for the Chinese Foreign Ministry:
  • Li Bijian is the Consul General of China to Karachi, Pakistan:
  • Deng Xijun is Ambassador of China to ASEAN:
  • Hua Chunying, (much loved here in China) is an eristic Foreign Ministry Spokesperson:

Sources of Interest 💡

  • The Everything Virus. Making sense of the ever-changing pandemic landscape over the past two years. This is the history of the coverage of Covid from around the world. Bloody long but worth the read. Just keep scrolling. [Columbia Journalism Review]
  • The narcissism of America’s race politics. “Black people in Britain are essentially immigrant communities — the average black American, by contrast, can trace his ancestry further back than the average white American.” Great piece on the differences between being black in America and being black in Britain. [Unheard]
  • The Secret Pentagon Photos of the First Prisoners at Guantánamo Bay. See them for yourself. [New York Times]
  • There’s a sleeping monster lurking at the center of our galaxy. Despite a first image showing a placid supermassive black hole hiding at the center of the Milky Way, the “gentle giant” has likely blasted nearby stars and planets for eons. [Grid]
  • America’s Best Astrophysicists Are Taking UFOs Seriously. Maybe You Should Too. NASA will fund a study looking into UFOs. [TIME]
  • The real reason toxic leaders keep getting promoted. [Quartz]

Happy weekend.