[Opinion] US Interest Rate Hike Period May Come Sooner Than Expected

Biden Administration's Challenge: Concerns Over Real Estate Prices and Keynesian-style Stimulus
To Be Effective, Must First Curb Inflation
Interest Rate Hike Likely Soon
Value and Dividend Stocks Expected to Perform Well in Such Times

▲ Seojun Sik, Professor of Economics, Soongsil University

The recently released inflation rate in the United States is showing alarming signs. What deserves particular attention is the trend in U.S. real estate prices. During the subprime mortgage crisis, the global financial crisis erupted because the real estate bubble was not proactively controlled. Due to this past experience, policy authorities, including the Federal Reserve (Fed), are likely on high alert.

From the perspective of policymakers, a certain level of inflation can be tolerated as healthy inflation resulting from economic recovery. However, the situation changes if household debt increases alongside rising housing prices. U.S. housing prices have been rising sharply since the beginning of this year. The increase in household debt is also significant. This is why we must keep in mind that interest rate hikes may begin sooner than expected.

The Biden administration is a strong follower of Keynesian economics. Tax increases on the wealthy and significant minimum wage hikes expand effective demand (money that translates into consumption). These are representative policies of Keynesians who emphasize economic stimulus. The logic is that if more taxes are collected from the rich and more money is given to the working class to buy bread, the working class will be satisfied, bakeries will do well, employment will increase, and the economy will revive.

A key premise to be cautious about in such Keynesian policies is that they should not be accompanied by rising prices. If the working class, who used to buy one loaf of bread, is now encouraged to buy two with price support, but the price doubles, they will only be able to buy one. The economic stimulus effect disappears.

This is why Keynesian policies became ineffective during the past oil shocks and why the current government's income-led growth policy has been undermined by the rapid rise in real estate prices. The U.S. Democratic government, experts in Keynesian economics, will likely try to stabilize prices before implementing income-increasing policies for the working class. To this end, they are highly likely to hasten interest rate hikes.

What is the right asset portfolio strategy in preparation for an interest rate hike period? Inflation concerns are shaking global financial markets. When the economy is not strong enough, a rapid rise in market interest rates makes it difficult for the real economy to endure. However, a properly paced interest rate hike can actually be beneficial for the future economy. This is if the purpose is to control excessive real estate prices and household loans and to properly implement Keynesian policies.

Unlike just before the 2007 global financial crisis, the Federal Reserve will not sharply raise the benchmark interest rate to 5.25%. The subprime mortgage was an overheated engine, so there was no choice but to pour cold water on it, which soon exploded. However, future interest rate hikes will cool the market heat gradually, like a water-cooled engine.

Interest rate hikes must begin quickly before excessive bubbles in some assets grow any larger. If the market shakes due to a faster-than-expected hike, it will be a good buying opportunity. On the contrary, if the interest rate hike is delayed and asset price bubbles grow, experts may sell more of their currently held stock assets.

In the past, during periods of moderate inflation and corresponding appropriate interest rate hikes, the performance of safe assets was extremely low. Funds first flowed out from growth stocks or tech stocks, and value stocks or dividend stocks with steady earnings performed well. According to recent reports from the World Economic Forum, IMF, and S&P, Korea’s economic conditions are better than those of other countries. Domestic companies will experience relatively smaller shocks. Avoid being swept up by external sentiment prematurely, and adjust your investment asset portfolio according to the situation to achieve good results.

This content was produced with the assistance of AI translation services.