Despite the US Fed's 'Big Cut', KOSPI Remains Stagnant... "Not Necessarily Good News" [AK Radio]

"Interest Rate Cuts Do Not Always Prevent Recession"
Diversification Needed in Bonds, Gold, REITs Investments

The recent big cut (large-scale interest rate reduction) by the U.S. Federal Reserve (Fed) has caused a significant stir in the global financial markets. This big cut marks the first interest rate reduction in about four and a half years since the COVID-19 pandemic crisis in 2020. Experts' interpretations and market reactions are divided. The Fed has expressed its intention to proactively respond to economic slowdown and employment market stagnation through the rate cut, but debates over its appropriateness and the future economic trajectory continue.

Last week, the Fed decided to deviate from the usual 0.25 percentage point rate hikes and instead implemented a 0.5 percentage point rate cut. This is known as a big cut. While past 0.25% increases or decreases are commonly called "baby steps," interest rate changes of 0.5 percentage points or more are referred to as "big steps" or "big cuts." Particularly, changes of 0.75 percentage points or more are termed "giant steps" or "ultra steps." This big cut contrasts with the previous rate hike trend and is seen as a shift in monetary policy.

Fed Chair Jerome Powell stated, "This rate cut is a preemptive measure to prevent a slowdown in the employment market," adding that there are no signs of a recession yet. However, experts remain cautious. Some point out that this big cut by the Federal Open Market Committee (FOMC) resembles the rate cuts during the 2007 global financial crisis, increasing uncertainty across financial markets.

Some experts positively evaluate this big cut as a preemptive response aimed at achieving a soft landing for the economy. They view the Fed’s early rate cut as a positive move to curb inflation slowdown and prevent cooling of the employment market. Chair Powell also emphasized, "The possibility of a recession is not high," and pledged to take appropriate measures to achieve a soft landing. Consequently, the U.S. stock market responded favorably to the Fed’s decision, with the Dow Jones Industrial Average and the S&P 500 continuing their upward trends.

However, historical cases show that large-scale rate cuts like this have sometimes failed to prevent recessions. During the Great Depression in the 1930s, the Fed implemented significant rate cuts, but bank failures and credit crunches prolonged the economic downturn. During the 2008 financial crisis, the Fed and other major central banks lowered rates to historically low levels, yet some countries experienced prolonged low growth and recession. Japan also implemented a zero interest rate policy for a long time after the 1990s asset bubble burst but failed to escape deflation.

[Image source=Reuters Yonhap News]

Due to these historical precedents, some market participants warn that this big cut could be interpreted as a sign of an impending recession and might trigger a sharp decline in asset markets. Concerns have been raised that the Fed’s rate cut timing may have been missed, and the effectiveness of the big cut will likely be judged based on upcoming economic indicators and market conditions.

Among investment experts, the prevailing opinion is that the rate cut will have a positive impact on the U.S. stock market. As the likelihood of a soft landing for the U.S. economy increases, there is speculation about a rise in the Nasdaq index, centered on technology stocks. Expectations of further rate cuts are also anticipated to promote global capital inflows into innovative industries such as artificial intelligence (AI). Additionally, with growing expectations that the Fed may implement additional rate cuts by the end of the year, the U.S. stock market is maintaining a positive trend.

On the other hand, the Korean stock market is showing a somewhat complex pattern. There have been voices advocating for Korea to implement rate cuts earlier than the U.S., but the overheating real estate market is intensifying the monetary policy dilemma. Currently, Korea is experiencing a significant increase in household loans due to the concentration in the real estate market, which could be an obstacle to rate cuts. However, if U.S. economic indicators are not worse than expected, there is a possibility that the Korean stock market could also be positively affected.

From an investment strategy perspective, as the rate cut phase begins, investments in bonds or gold are emerging as promising options. Bonds are considered good investment products during rate cuts because their prices rise when interest rates fall. Experts note that long-term bonds can yield double-digit returns even if interest rates drop by just 1%.

Moreover, real estate indirect investments such as REITs (Real Estate Investment Trusts) are also attracting attention as investment targets that can expect increased dividend income and capital gains due to rate cuts. When selecting REITs, it is advantageous to invest in real estate with low economic sensitivity and steady demand, according to analyses.

In conclusion, the Fed’s big cut represents a significant turning point with a major impact on the global financial market. The direction of financial markets will likely be determined by the Fed’s potential additional rate cuts and economic indicators, and investors are expected to require careful observation and prudent strategies.

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