[Good Morning Market] U.S. Closes Lower on Further Rate Hike Signals This Year... Volatility Expected to Rise in Korea

FOMC Delivers a More Hawkish Outcome Than Expected, Dragging Down U.S. Stocks

Korea Also Impacted... But "Focus Should Be on 10-Year Treasury After September"

The U.S. stock market closed lower following a more hawkish-than-expected outcome at the Federal Open Market Committee (FOMC) meeting, and volatility is also expected to increase in the Korean stock market.

AP Yonhap News

On the 16th (local time), the Dow Jones Industrial Average closed at 51,461.90, down 631.21 points (1.21%) from the previous session. The S&P 500 Index fell by 33.92 points (0.45%) to 7,551.81, while the Nasdaq Index declined by 3.15 points (0.01%) to finish at 25,978.43.

The stock market focused on the FOMC’s decision to raise the U.S. base interest rate. The FOMC set the federal funds rate at an annual rate of 3.75-4.00%, raising it by 0.25 percentage points.

Additionally, the dot plot now indicates a median year-end base rate of 4.1%, up from the previous forecast of 3.8%, signaling the possibility of further increases this year. The median value for the end of next year was also set at 4.1%. The dot plot is a tool that displays FOMC members' projections for future policy rates.

Positive economic prospects and changes in inflation appear to be the background for the upward revision in the dot plot. The U.S. real gross domestic product (GDP) forecast for this year was raised from 2.2% to 2.3%. The unemployment rate was lowered from 4.3% to 4.1%, but the personal consumption expenditures (PCE) price index inflation forecast was raised from 3.6% to 3.7%. Some analysts say this suggests that the Federal Reserve is not hiking rates to counteract growth risk, but rather because the stronger-than-expected economy and labor market can withstand tighter policy.

Ji-Young Han, a researcher at Kiwoom Securities, explained, "Since the rate hike at the September FOMC was already largely priced in by the market, it was a secondary factor. The key issue was whether this would be a one-time hike or whether it signaled the beginning of a new rate hike cycle. Among these factors, the dot plot, economic outlook, and Chair Kevin Walsh’s press conference all delivered more hawkish results than expected, which triggered the decline in U.S. stocks immediately after the FOMC."

On the 17th, the domestic stock market is also expected to reflect the U.S. situation and see heightened volatility. However, experts emphasize that historically, rate hikes alone have not often led directly to a downward trend in stock markets.

One research analyst pointed out, "Since 1994, the Fed has conducted six rate hike cycles, during which the average return of the S&P 500 was 7.5% and that of the KOSPI was 9.1%, indicating performance was actually better than during rate cut periods. This does not mean rate hikes are positive for stock markets, but it suggests that economic and earnings cycles at the time had a greater impact on stock prices than the direction of monetary policy itself."

He added, "After the September FOMC, it is more appropriate to focus on the direction of the U.S. 10-year Treasury yield. Even if the 10-year yield remains above 5.0%, the important issue is how fast it rises and whether earnings momentum is maintained during that process."

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