Interest Rate Hikes Are Not Over Yet

The U.S. Federal Reserve had initially projected a freeze in interest rates but revised this immediately after the release of the Consumer Price Index (CPI). With core inflation exceeding expectations, there was pressure for an inevitable rate hike, contrary to previous forecasts.

The Fed determined that if inflation was higher than expected, it would have no choice but to change its monetary policy direction. As soon as the inflation data was released, market pressure led to a shift towards interest rate hikes.

This suggests a path of three interest rate hikes in total, including those already implemented.

This aligns with the view that there could be at least one, and up to two, rate increases this year, implying that the interest rate hike cycle could continue until early next year.

This is interpreted to mean that current monetary policy and various financial conditions are insufficient to curb inflation.

This provides a fundamental reason why Fed officials must consider interest rate hikes, increasing pressure for additional increases. The market expects the Fed to continue raising rates based on this understanding.

This diagnosis suggests the Fed may pursue a more aggressive tightening policy than anticipated, potentially having a greater impact on the economy as a whole.

This is to prevent inappropriate political interpretations and maintain the independence of monetary policy decisions.

In practice, benchmark interest rate decisions are made not by the opinion of a specific individual, but through market pressure and the consensus of the majority of Fed officials. Therefore, Fed officials try to avoid unnecessary political influence on policy decisions.

The Fed's policy decisions are based solely on economic indicators and the consensus of its members, maintaining a stance of distancing itself from external political pressure.

As long as this fundamental trend continues, interest rate hikes are inevitable.

While there had been expectations that the Fed would be reluctant to raise rates, it is now widely believed that these expectations are difficult to defend. The expectation of the Fed pausing hikes is no longer valid.

The Fed's Board of Governors always casts votes, while regional Fed presidents vote on a predetermined rotation cycle. Some presidents vote once every three years, while others vote annually.

The outlook for the stock market remains conservative compared to a week ago. Rising oil prices are a greater factor than rising interest rates in causing stock declines.

Rising oil prices led to stock price declines, and conversely, when oil prices fell, stock prices rebounded. Currently, rising oil prices are coupled with rising interest rates, and the risk of rapid tightening is increasing as the benchmark interest rate hike cycle may be stronger than expected.

These complex factors lead to the judgment that this is not a good environment for risk assets, especially the stock market.

In March 1997, there was a case where the cycle ended with only a single benchmark interest rate hike. The economy was very strong then, but inflation was not high, so there were no additional hikes.

The similarity between the current situation and 1997 lies in robust growth. Also, the fact that the 10-year yield rose by about 100 basis points in 1997, and currently, the 10-year yield has risen from 4% to 5%, is very similar.

While stock prices tend to trend upwards in the long run, there is a high probability of a 5-10% correction when tightening policies begin. Such corrections have frequently occurred in past cases.

Even after a correction phase, stock prices have sufficient potential to return to an upward trend, so while short-term corrections are unavoidable, the long-term outlook remains positive.

The key to stock price appreciation depends on how high the final interest rate level becomes relative to the current growth rate. If interest rates do not exceed a certain threshold, stock prices can maintain an upward trend.

For the U.S. benchmark interest rate, around 5% is judged to be an important threshold. If it does not exceed this level, stock prices still have room to rise.

1997 was a period of massive investment as the telecommunications and internet revolutions were emerging. The current AI revolution shows very similar patterns in terms of investment.

However, the economic environment in 1997 had better growth rates and interest rate levels than today. Therefore, while the situation is close to 1997, it is not expected to repeat exactly the same.

The 1997 case is cited as an exception where the intensity of the correction was low.

Even in 1997, the market struggled for the first month or two after the hike, but then returned to an upward trend. This suggests that while short-term corrections are expected during the current interest rate hike period, there is a possibility of returning to an upward trend in the long term.

Macroeconomic indicators can change so rapidly that they can be wrong daily.

Therefore, it is crucial for macro analysts to constantly analyze data, revise forecasts, and flexibly respond to market trends.