Market's Excessive Worry... "US Base Interest Rate Hike May Not Be So Soon"

Continued Easing Monetary Policy Expected... Base Rate Hike Anticipated Only After 2023
Stock Market Seeking New Momentum... Focus on US Stimulus Package on 31st
"Additional Gains Possible in Infrastructure, Green Sectors"

Jerome Powell, Chairman of the U.S. Federal Reserve (Fed), acknowledged on the 17th that some assets are overvalued but drew a line by stating that it is not the time to discuss tightening policies. The photo shows Chairman Powell holding a press conference on March 3 last year when he unexpectedly announced an interest rate cut. [Image source=Yonhap News]

[Asia Economy Reporter Minwoo Lee] There have been criticisms that the market's concerns about an early interest rate hike are excessive. Considering the stance of economic authorities such as the U.S. Federal Reserve (Fed), the actual timing of the hike could be somewhat later than the market's expectation (end of 2022). Even if the timing is brought forward, since economic recovery is a prerequisite, the impact on the market is expected to be limited.

On the 27th, KB Securities analyzed that the market might be misjudging the recent concerns about a U.S. interest rate hike. It is expected that the accommodative policy stance will continue for the time being. Various policy officials have also expressed similar views.

Accommodative Policy to Continue for the Time Being... Interest Rate Hikes Expected Only After 2023

On the 24th, Raphael Bostic, President of the Federal Reserve Bank of Atlanta, stated in an interview with The Wall Street Journal (WSJ) that interest rate hikes are expected only in 2023. He also saw no problem with the rise in the U.S. 10-year Treasury yield. He indicated that this policy stance would not change for the next few months until the economy improves. Earlier, President Bostic had mentioned the possibility of tapering (reducing asset purchases) within the year in January, which triggered a stock market decline. He later admitted that his remarks were a mistake and clarified that the Fed's long-term monetary policy goal is to sufficiently recover the economy. KB Securities researcher Ilhyuk Kim analyzed, "After somewhat prematurely raising concerns about tightening, the Fed is now aligning its monetary policy stance."

Charles Evans, President of the Federal Reserve Bank of Chicago, also said in a virtual talk hosted by the Chicago U.S.-Japan Association, "If inflation continues to rise, the Fed may act sooner, but the actual timing of raising the target interest rate will be in 2024." James Bullard, President of the Federal Reserve Bank of St. Louis, also predicted that the Fed would maintain zero interest rates until the end of 2023.

Since the timing of the interest rate hike is expected to be after 2023, the market's concerns are considered excessive. Researcher Kim explained, "Based on the recent dot plot, Fed officials generally expect to keep the interest rate unchanged until the end of 2023," adding, "The dot plot may be revised upward at the June Federal Open Market Committee (FOMC) meeting, but there is still a significant gap compared to the market's current expectation of a hike starting at the end of 2022." JP Morgan has already begun to mention the possibility that the market's expectations for interest rate hikes are excessive. It is analyzed that even after the financial crisis, the market feared that the Fed would raise interest rates early and quickly. Researcher Kim forecasted, "Although the timing of the Fed's interest rate hike may be brought forward, since a strong economic recovery is a prerequisite, the market impact of the rate hike will not be significant."

Economic Normalization is a 'Constant'... Market Seeking New Momentum

[Image source=Yonhap News]

Meanwhile, on the 25th (local time), U.S. President Joe Biden held his first press conference since taking office and raised the COVID-19 vaccine distribution target. At the time of his inauguration, President Biden set a goal of 1 million daily vaccinations for the first 100 days. This was later raised to 1.5 million, and at this press conference, it was increased once more to 2 million. The recent 7-day average vaccination rate is approaching 2.5 million, so if this pace is maintained until the end of the 100 days next month, the goal is expected to be comfortably achieved.

The COVID-19 pandemic received little attention during the press conference, with only one related question asked. The market also judged that economic activity normalization is relatively clear. Researcher Kim said, "Although risks have not completely disappeared, such as an increase in new cases in 20 states, the vaccination speed is so fast that the market expects the virus to be well controlled," adding, "Sectors sensitive to economic recovery, such as consumer discretionary, materials, and industrials, which were previously attracting attention due to expectations of earnings improvement, will now see stock prices rise as earnings are confirmed."

Accordingly, as economic normalization is gradually reflected in prices, the market is looking for new growth factors. This is why expectations are rising for the details of the new stimulus package to be announced on the 31st. Researcher Kim predicted, "Since the infrastructure investment plan is receiving bipartisan support, sectors related to materials, industrials, and utilities are expected to attract attention," adding, "Policies addressing climate change will also be included, so eco-friendly related stocks will secure new growth drivers."