Growing Economic Concerns Amid Interest Rate Hikes... Importance of Interest Rate Direction

[Asia Economy Reporter Hwang Junho] The United States has reaffirmed its commitment to controlling inflation by raising the benchmark interest rate through the Federal Open Market Committee (FOMC). Amid growing concerns about the economy, a decline in stock indices is considered inevitable.

On the 5th, KB Securities analyzed the results of investigating cases where monetary easing transitions occurred alongside economic contraction and interest rate hikes.

KB Securities examined past instances when the ISM Manufacturing Index, which has high explanatory power not only for the economy but also for corporate profits, entered a contraction phase (below the baseline of 50). Since 1974, there have been about 20 periods where the ISM Manufacturing Index remained in contraction for more than two months. In 80% of these periods, the S&P 500 rose, with an average change rate of 12.1%. However, Researcher Ahn stated, "The strong stock market performance despite economic contraction is largely believed to reflect expectations that monetary policy would shift to easing or would be eased in response to the economic downturn."

In fact, except for one instance among the 80% of periods, monetary policy turned to easing. Most of the time, the benchmark interest rate was cut, and other measures were taken to maintain the already low benchmark rate or to stabilize long-term interest rates downward.

Researcher Ahn said, "Currently, the ISM Manufacturing Index is on the verge of entering a contraction phase," adding, "If the U.S. economic contraction intensifies, a shift to an easing monetary policy stance as described above would be the most ideal scenario for the stock market."

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