Giant Step Taken for the First Time in 28 Years... What Is the Impact on the Korean Stock Market?

[Asia Economy Reporter Kwon Jae-hee] As the United States took a giant step by raising the benchmark interest rate by 0.75 percentage points at the June Federal Open Market Committee (FOMC) meeting?the first such hike in 28 years?attention is focusing on the potential impact on the Korean stock market.

Amid criticisms that the rate hike timing was already missed, fears of stagflation (rising prices amid recession) are also growing. There are forecasts that interest rates could rise to as much as 4% by the end of this year. Since the market has already entered a bear market and stagflation is overlapping, analysts say this could inevitably have a negative impact on the Korean stock market. However, experts believe that due to the Korean stock market’s characteristic of preemptively reflecting negative factors, further declines will likely be limited.

◆ Looking back at the two previous 'Giant Steps' = Historically, rapid interest rate hikes have often led to economic recessions, with the 1980 and 1994 cases of giant steps being representative examples.

First, the 1980 giant step was triggered by the 1970s oil shock. Along with the oil shock and increased dollar issuance, the inflation rate soared to a staggering 13.3% in 1979. Then Fed Chairman Paul Volcker raised interest rates nearly 10 percentage points within three months of his appointment, from 12.2% to 22%. As a result, inflation dropped to the 4% range by 1982, but this also brought side effects such as a sharp economic slowdown marked by double-digit unemployment rates and a wave of corporate bankruptcies.

The 1994 case is summarized as the 'bond massacre.' At that time, concerns about inflation rose amid a financial policy easing trend, prompting then Fed Chairman Alan Greenspan to preemptively raise the benchmark interest rate by 3 percentage points within a year (from February 1994 to February 1995). Especially since the rate hikes were implemented suddenly without communicating with the market, the bond market experienced a price crash (bond yields surged) known as the 'massacre.' The U.S. raised rates seven times in one year by 0.75 percentage points each time, causing rapid capital outflows centered on emerging markets and spreading a global crisis. Korea also faced the 1997 foreign exchange crisis as a result of this impact.

◆ Korean stock market already in a bear market = The KOSPI index has already fallen more than 20% from its peak, entering a bear market, and with the added fear of stagflation, forecasts suggest a negative impact on the Korean stock market. However, it is pointed out that it is not beneficial to engage in panic selling driven by pessimism and fear. While there may be a short-term rebound due to the resolution of uncertainties surrounding the giant step, experts believe the possibility of further declines is low since the Korean stock market tends to preemptively reflect negative factors more than advanced markets like the U.S. and has already undergone sufficient adjustment.

Lee Kyung-min, a researcher at Daishin Securities, said, "Investor anxiety is expected to calm down following the June FOMC, and an 'relief rally' driven by buying at the third-quarter bottom is likely to continue. Although volatility may increase due to inflation shocks, premature panic selling is not beneficial."

Lee added, "The KOSPI is expected to show solid profit momentum during the technical rebound supported by the 2400-point level, but attention should be paid to the recovery strength of sectors such as internet, secondary batteries, and semiconductors, which experienced large declines."

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