Securities Firm's Reflection: "Major Mistake This Year Was Overlooking the Possibility of Prolonged Tightening"

Reflection Letter with Shin Young Securities Research Center Researchers
Publication of Report Titled 'My Mistakes in 2022'

Kim Hak-gyun, Head of Research Center at Shin Young Securities.

[Asia Economy Reporter Jang Hyowon] Kim Hakgyun, Head of Shin Young Securities Center (photo), reflected on the stock market this year and cited overlooking the possibility of prolonged U.S. monetary tightening as his biggest mistake.

On the 29th, Kim Hakgyun published a report titled "My Mistakes in 2022" together with researchers from Shin Young Securities Research Center. Kim said, "My biggest mistake this year was underestimating the likelihood of prolonged tightening by central banks," adding, "At the Federal Open Market Committee (FOMC) regular meeting held just before the start of this year, the U.S. Federal Reserve (Fed) kept the benchmark interest rate unchanged, and the dot plot indicated a year-end target rate of 0.75?1.0%."

However, the Fed raised interest rates seven times since March. In March alone, it took a baby step of a 0.25 percentage point hike, but then implemented two big steps of 0.5 percentage points and four giant steps of 0.75 percentage points. As a result, the U.S. benchmark interest rate rose to 4.25?4.5% by the end of the year.

Kim said, "While the Fed's actions could be considered surprising, I have regrets about my judgment in three respects." The first of the three points he mentioned was the soaring U.S. Consumer Price Index (CPI). Early this year, the U.S. CPI rose 6.8% year-on-year, and the core CPI increase reached 4.9%. He said, "Considering the self-reinforcing nature of inflation, I should have taken into account that prices could soar much higher than the Fed's guidance."

The second point was the Russia-Ukraine war. He reflected, "The war broke out amid rising inflationary pressures. Even if the outbreak of the war was unpredictable, we should have recognized early on that the inflationary impact could be greater."

The third point was an excessive belief in the justification for maintaining low interest rates. He stated, "I thought that not only inflation control but also financial stability would be important considerations for the U.S. central bank," adding, "However, the interest rate level that became the inflection point in decision-making was much higher than I had expected."

Finally, he said, "While we often experience this in asset price movements, in 2022 I realized that economic behavior and policy decisions also show a self-reinforcing process expressed as inertia and acceleration once they tilt in one direction," and added, "Rather than trying to hit the inflection point, it might have been wiser to acknowledge that an established trend can strengthen further and to devise counter-strategies accordingly."

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