In the investment market, financial news is often inseparable from local government policies. There are two main directions involved, monetary policy and fiscal policy. Here is a brief explanation for everyone.

Main differences in policies

Simply put, monetary policy is the regulation of market money supply through actions such as interest rate increases and decreases and open market operations. It can affect the foreign exchange market, stock market, bond market and other trends, and is highly linked to the financial market.

Fiscal policy is the government's allocation of national income and expenditure, which affects the economic growth rate through government expenditure, changes in tax revenue, various welfare subsidies, etc. In macroeconomics, the common formula is:

GDP = C + I + G + (XM). C = consumption, I = investment, G = government spending, X = total exports, M = total imports

It can be seen that the expansion or reduction of government spending directly affects changes in economic growth. If it is a capital project, it can also directly affect the total investment. If it is an increase or decrease in various welfare subsidies, it will directly affect consumption. For example, subsidies for electric vehicles change consumers' willingness to buy.

Monetary policy is controlled by the central bank and generally does not require the consent of Congress or the executive branch, but the promotion of fiscal policy mostly needs to be formulated and approved by Congress, which makes it more difficult to respond in real time. Therefore, in the face of a complex and changing macroeconomic environment, monetary policy is relatively flexible and timely. However, fiscal policy can generally be invested more directly in the real economy, while monetary policy requires more objective factors to cooperate.

Central Bank Interest Rates and Lending

The benchmark interest rate is determined by the central bank based on the relationship between the supply and demand of funds and future prospects. It is the basis for the evaluation of all financial assets and is interrelated with the flow of funds. The central bank often hints or directly adjusts the interest rate, which will be quickly reflected in the market.

In the foreign exchange market, the interest income or expense generated by interest rates can affect investors' decisions and of course can also cause fluctuations in exchange rates. It is the time value of money, and the profit or loss during the holding period depends on the interest rate.

In the bond market, bond prices and yields are inversely related. When investors or financial institutions assess the value of bonds, they use the benchmark interest rate as a reference, and then calculate based on the risk level and time length. Since the benchmark interest rate is actually the opportunity cost of holding bonds, once the interest rate rises, the bond price will fall, thereby causing the bond interest rate to rise. Therefore, the interest rate and bond yield are in a disguised positive relationship.

In the stock market, the level of the benchmark interest rate directly affects the attractiveness of dividend yields. For example, when the central bank starts a rate hike cycle, it prompts market funds to flow back to bank deposits, which may also affect corporate profits and borrowing costs, often hitting the performance of higher-risk assets. On the contrary, when the central bank starts a rate cut cycle, it is conducive to stock price increases.

In terms of financial institutions, changes in benchmark interest rates directly affect loan and deposit rates. For example, when the central bank starts a cycle of interest rate cuts, the opportunity cost of investment will be lower for both borrowers and enterprises when evaluating investment plans, and the direction may be more aggressive, which is conducive to promoting more investment plans. On the contrary, when the central bank starts a cycle of interest rate hikes, rising costs often make investment more conservative.