What is the Impact of the US Federal Reserve's Interest Rate Hike on the Market?

The U.S. Federal Reserve (Fed) implemented a 25bp (0.25 percentage point) interest rate hike for the first time in 3 years and 2 months.

This is because both hawks and doves prioritize preventing the entrenchment of inflation, and the Fed's most important goal is to stabilize inflation expectations.

The Fed's dot plot indicates the possibility of one more interest rate hike within this year.

This is interpreted as the Fed's intention to control inflation expectations and manage key factors for future economic growth.

The dot plot indicates that inflation is expected to genuinely decline next year as energy and supply chain issues ease.

The Fed forecasts personal consumption expenditure (PCE) inflation to be 3.7% in 2026 and 2.3% in 2027, expecting a recovery in the growth and productivity cycle once inflation stabilizes.

The Fed forecasts next year's GDP growth rate to be higher than this year's, assessing that current interest rate levels are not restrictive enough to harm economic growth.

This confidence reflects the Fed's view that, along with inflation control, the possibility of a soft landing for the economy is high.

Currently, the 10-year nominal Treasury yield is 5.02%, and the 10-year Treasury Inflation-Protected Securities (TIPS) yield is 2.65%.

The long-term inflation expectation, derived by subtracting the TIPS yield from the nominal yield, is 2.37%, suggesting that a price target of approximately 2% is being maintained when inverted based on PCE.

If the stabilization trend of inflation expectations is maintained, the likelihood of a crash in risky assets due to interest rate hikes driven by inflation is considered low.

However, factors stimulating commodity prices due to AI infrastructure and data center investments still persist.

If the inflation rate enters the 2% range next year, there is a high possibility that the additional interest rate hike cycle will conclude.

Market reactions to interest rate changes are merely short-term forecasts, and the Fed's ultimate goal is to manage inflation expectations.

Since inflation expectations are currently well managed, we need to continuously assess whether a long-term upward market cycle can be expected.

Interest rate hikes alone do not lead to a prolonged market downturn.

Significant market impact occurs when both interest rates and inflation expectations rise together, but currently, inflation expectations are being controlled.

Funds collected by the government through tax payments eventually flow back into the market.

When the balance in the U.S. government's cash ledger, the Treasury General Account (TGA), begins to be released, it will have the effect of injecting money into the market, with liquidity release particularly expected in October and November.

Since market movements tend to precede the Federal Reserve, it is crucial to monitor inflation expectations daily.

Specifically, the Break-Even Inflation (BEI) indicator, which is the difference between nominal Treasury yields and Treasury Inflation-Protected Securities (TIPS) yields, should be used to confirm whether inflation expectations are excessively volatile.

This indicator moves daily and reflects market inflation forecasts in real time, making it an important clue for predicting future market direction.

By continuously understanding how the Fed's interest rate hike stance affects market inflation expectations, we can prepare for potential sudden changes in financial markets.

If interest rate hikes continue, the lending cycle contracts, reducing the investment capacity of small and medium-sized enterprises (SMEs).

Investment in AI data centers by large corporations alone has limitations in achieving actual productivity improvements. Cost reduction and productivity innovation are a cycle completed through capital expenditure (CAPEX) by SMEs, making their sustained participation key.

The US administration is pushing to announce banking regulation reforms by year-end, signaling an intent not to tighten liquidity but rather to release more.

This is a strategy to reduce bank cash holdings and encourage lending expansion, aiming for credit creation and broad money expansion. Federal Reserve Board members such as Michelle Bowman, Christopher Waller, and Steve Mina are being mentioned as working-level officials for the regulatory reform.

Just as productivity did not appear immediately then, and IT productivity only began to manifest after fiber optics were laid and the internet became widespread, current data center construction is infrastructure investment. A true productivity revolution will begin when a stage of combining platforms to lower costs arrives in the future.

According to recent remarks by Governor Christopher Waller, discussions are underway at the U.S. Department of Commerce to reform the Personal Consumption Expenditures (PCE) index.

If certain items, such as stock market trader fees, are revised, the PCE figure could decrease by 0.1-0.2 percentage points. This is interpreted as the government's effort to lower indicator figures to achieve the effect of curbing inflation expectations.

He emphasized that, using the NASDAQ situation in 1999 as an example, the key is to determine whether the current market is in a cycle of sustained expansion.

Due to the high inflation environment, a sustained high interest rate environment is expected, with a low probability of rate cuts.

In such a situation, it is necessary to select and invest in companies that have momentum and quality, even if their valuations are high.

The key indicator for judging whether a company's performance is maintained is to consider the direction of government industrial policy.

September could be a period of liquidity vacuum, leading to significant market volatility, requiring caution. However, he assessed that excessive fear is unnecessary as inflation expectations are controlled.

In the current situation, risky assets are expected to rebound after volatility, driven by government liquidity policies.

Therefore, in an upward phase, a strategy of buying when the market declines remains valid.