Will the Interest Rate Freeze Be a Bullish Momentum for the Stock Market?

The recent rise in oil prices stems from internal rifts within the Organization of the Petroleum Exporting Countries (OPEC) due to conflicting interests among member states. This has made it difficult to adjust crude oil production, increasing oil price instability. Furthermore, a shortage of refining facilities for product production, not just crude oil, is fueling price increases.

The utilization rate of US refining facilities is close to 98%, reaching a limit where further production increases are difficult, which supports these structural issues.

However, a significant economic blow is expected if prices exceed $120. Looking at past oil price surge episodes, the risk of recession tended to increase sharply when monetary policy tightening was accompanied by the oil price increase itself.

Research Fellow Park Jun-woo believes that oil prices up to $110 are manageable to some extent.

The Taylor Rule is a model that suggests an appropriate interest rate band considering economic variables such as inflation and employment. While the appropriate interest rate band changes depending on the set values in this model, the lower bound of the band continues to rise as the current US economic situation improves. The Federal Reserve's (Fed) criticized delay in responding to inflation in 2022 also indicates room for interest rate hikes.

One reason the stock market may not be severely impacted even if the US Fed implements two additional rate hikes is that the current interest rate level is not very contractionary.

In other words, the market has already somewhat priced in the possibility of interest rate hikes and tends to interpret that the rate hikes themselves do not impose a significant burden on the economy.

In the current market environment, a strategy favoring risky assets such as stocks and corporate bonds over government bonds is effective. This is because economic growth is supported despite rising interest rates. It is necessary to distinguish between a 'good interest rate hike' that reflects growth and a 'bad interest rate hike' due to inflation concerns.

Currently, the view that growth is strong prevails, placing risky assets in a more advantageous position than bonds.

Therefore, as long as economic growth does not falter, the upward momentum of the stock market is expected to continue.