The Impact of Fed's Interest Rate Hike on RMB Exchange Rate: Based on Stepwise Regression Modelling

Abstract

In the late stage of the epidemic, the Federal Reserve raised interest rates several times in a row in response to domestic inflation, which had a significant impact on the international financial environment, as exemplified by the fluctuation of the RMB exchange rate. Although several worldwide and domestic scholars have used various models to study the relationship between them, there are no studies that have used linear regression models t to clarify how the two are connected. This study uses stepwise regression on the basis of linear regression to establish an optimal model for studying RMB exchange rate fluctuations and the Fed's monetary policy adjustment, which fills this research gap. It is found that Fed rate hikes cause the RMB exchange rate to decline., while the RMB exchange rate is also negatively affected by the seven-day repo rate in China's interbank market and the People's Bank of China's foreign exchange reserves. Therefore, this study concludes by recommending that investors, Chinese foreign trade firms and People’s bank of China take appropriate measures to minimize the impact of RMB depreciation in anticipation of the Fed's interest rate hike.