"US Federal Reserve Early Tightening: Beware of Overinterpretation and Overreaction"

Economic Recovery Outlook Still Valid
Recovered Economic Indicators May Change Fed Sentiment

On the 3rd (local time), traders are working on the floor of the New York Stock Exchange (NYSE) in the United States.
[Image source=Yonhap News]

[Asia Economy Reporter Minwoo Lee] Recently, the U.S. Federal Reserve (Fed) has shown signs of tightening monetary policy earlier than expected, causing fluctuations in domestic and international stock markets. However, market reactions are somewhat over-sensitive, and it is necessary to consider the special circumstances of the beginning of the year. Analysts maintain that the outlook remains valid, as inflationary pressures are easing more than initially anticipated, economic recovery continues, and central banks are expected to proceed cautiously with tightening measures.

On the 9th, Samsung Securities interpreted the domestic and international stock markets for the new year in this way. Major U.S. stock indices mostly declined during the first week of the year. The S&P 500 index fell about 1.9%, marking the worst weekly decline since 2016 at the start of the year. The Nasdaq index dropped more than 4.5% during the same period, and the Dow Jones Industrial Average decreased by 0.29%. The domestic stock market showed a similar trend. The KOSPI fell 0.76%, and the KOSDAQ dropped 3.75% in the first week of the new year. The release of the Federal Open Market Committee (FOMC) minutes from December revealed a more hawkish stance than expected, which dampened investor sentiment amid concerns of early tightening.

Nevertheless, Samsung Securities researcher Seojung Hoon emphasized that the outlook for economic recovery remains valid. Although concerns about early tightening by the Fed intensified following the release of the December FOMC minutes, especially due to active discussions on quantitative tightening aimed at absorbing market liquidity, the three rate hikes had already been anticipated through the dot plot provided by the FOMC on December 15. Clues about quantitative tightening were also revealed through speeches by key Fed officials. While the minutes mentioned these specifics, they were not outside the market’s expected range.

In fact, indicators reflecting volatility in the U.S. stock and bond markets, such as the VIX and MOVE indices, have remained lower than at the end of November last year. Researcher Seo explained, "The shift in the Fed’s policy focus was well anticipated, but the market’s response was deferred throughout the end of last year and has been actively reflected since the new year. The resulting turnover process led to profit-taking in growth stocks, which soared last year, and bargain buying in value stocks, causing volatility to be perceived as higher than it actually is."

He also suggested that the possibility of more than three rate hikes and steep quantitative tightening should be questioned. The simultaneous occurrence of tapering (asset purchase reduction), rate hikes, and quantitative tightening is an extremely hawkish move. Although inflationary pressures are the highest since the 1970s, there remain many doubts about dismissing the previously mainstream view of "transitory inflation." Workers are steadily returning to the labor market, and significant reductions in various logistics costs have been observed, signaling easing bottlenecks in many areas.

Researcher Seo noted, "The ISM manufacturing and services indices released last week confirmed improvements in employment and reductions in delivery times. Upcoming inflation data are likely to show signs of passing the peak, which would increase the probability of the Fed revising its comprehensive tightening approach."

Ultimately, the outlook for economic recovery remains valid. Inflationary pressures are easing more than initially expected, economic recovery is accelerating, and central banks are expected to proceed cautiously with tightening. Researcher Seo concluded, "Stock market gains are likely to follow improvements in fundamentals sufficiently, so it is necessary to consider that the absolute level of real interest rates is forming higher than before as a signal of Fed tightening. This will negatively impact growth stocks, while domestic IT and automobile sectors may see improved business conditions and enhanced appeal as value stocks."

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