What are the consequences for Taiwan under the US interest rate hike? 2024 Interest Rate Decision Overview

The Fed’s Aggressive Rate Hike Cycle

Since March 2022, the Federal Reserve has launched a rare aggressive rate hike plan. By the end of 2023, there have been a total of 20 rate hikes, totaling 500 basis points, with the benchmark interest rate jumping from near zero to the 5.00%–5.25% range.

Compared to over thirty years of rate hike history, this cycle is arguably the most rapid. In ten Federal Open Market Committee meetings, the Fed consistently raised the benchmark rate, especially in April, July, September, and November 2022, when rates were increased by 75 basis points for four consecutive months, setting a historical record. The fundamental driver behind all this is runaway inflation—by June 2022, the US inflation indicator reached a 40-year high.

As inflation gradually recedes, market expectations about whether the Fed will continue to raise rates become increasingly complex. Although inflation levels are decreasing month by month, there is still a gap from the 2% target. Meanwhile, the banking crisis that erupted in 2023 has also raised concerns about financial stability. According to market forecasts, the Fed may still implement multiple rate adjustments in 2024.

2024 Fed Meeting Schedule Forecast (Taiwan Time)

How Rate Hikes Change Financial Markets

Direct Reaction in the Foreign Exchange Market

Rising interest rates attract a large amount of international capital seeking yields. After bank deposit rates increase, foreign investors rush to buy US dollars and deposit them in American banks. As a result, the US dollar appreciates. In 2022, the US dollar index rose by 8.5% in a single year, demonstrating a strong performance that shook global financial markets.

Stock Market Pressure

Rate hikes exert a dual impact on the stock market. First, in financial asset pricing, there is an inverse relationship between market interest rates and asset prices. The higher the interest rate, the lower the valuation of listed companies, leading to falling stock prices. Second, rising rates increase corporate financing costs, eroding net profits and reducing shareholder returns.

In 2022, global stock markets were in turmoil— the S&P 500 fell by 17%, and the Nasdaq dropped as much as 30%. However, in 2023, the stock market began to bottom out and rebound, reflecting investor expectations that the Fed might stop raising rates or even start cutting. It’s important to note that stock market volatility is influenced by many factors; rate hikes are just one of them.

Gold and Bonds Move in Opposite Directions

Gold prices have an inverse relationship with interest rate expectations. When the market anticipates the Fed will intensify rate hikes, investors shift toward cash assets, reducing demand for gold. Conversely, the opposite is true. Therefore, rate hikes do not necessarily be bearish for gold; it depends on how policy expectations evolve. Gold continued to decline before November 2022, but then rose steadily, reflecting a shift from “continued rate hikes” to “cutting rates soon.”

The logic in the bond market is even more straightforward—bond prices move inversely to interest rates. Rate hikes directly depress bond valuations. The 2023 US banking crisis partly stemmed from this: banks holding large amounts of bonds saw their values plummet during rate hikes, and when depositors withdrew funds, banks were forced to sell bonds at a loss, creating a vicious cycle.

How US Rate Hikes Impact Taiwan’s Economy

Chain Reaction of the TWD Depreciation

The appreciation of the US dollar also means the depreciation of the TWD. A strong dollar reduces the amount of TWD needed to exchange for USD, decreasing purchasing power. Since many imported goods in Taiwan are priced in USD, TWD depreciation directly pushes up import prices.

This is most directly felt in daily life— in 2022, Taiwan’s consumer price index for food rose by 6%, with egg prices soaring by an astonishing 26%. Behind this seemingly simple egg price increase is rising import feed costs. Major feed ingredients like corn, sorghum, and barley are imported from the US, which is Taiwan’s most important agricultural product supplier, with 22.8% of imported agricultural products coming from the US last year.

To prevent further TWD depreciation, Taiwan’s central bank also raised interest rates, increasing rates five times since 2022, with a total increase of 75 bps. However, compared to the Fed’s aggressive measures, this adjustment is clearly insufficient to effectively counteract the TWD’s depreciation trend.

Hidden Risks of Capital Outflows

Currency depreciation also triggers more serious consequences—capital outflows. Imagine you are a foreign investor, exchanging $100,000 USD for 2.7 million TWD to invest in Taiwan stocks. After one year, your paper profit is 300,000 TWD, which should be exciting. But in 2022, the TWD depreciated by 11% against the USD, so 3 million TWD can only be exchanged back for $97,000 USD, resulting in a loss. Under such circumstances, the rational choice is to sell stocks and exchange USD to protect capital. When most investors do the same, the stock market will experience significant volatility.

Challenges Facing Taiwan’s Stock Market

Rate hikes exert a dual pressure on Taiwan stocks. On one hand, the appreciation of the USD leads to foreign capital withdrawal, putting pressure on stock market liquidity. On the other hand, Taiwan’s follow-up rate hikes raise the risk-free rate, lowering stock valuations and reducing attractiveness.

Data clearly illustrates the dilemma: in 2022, Taiwan’s net capital outflow was $41.6 billion, the largest in Asia. The same year, the Taiwan Weighted Index fell by 21%, ranking at the bottom among major global stock markets.

However, crises also contain opportunities. During a rate hike cycle, financial institutions like banks benefit from the widening interest spread, enhancing profitability. For example, Taiwan Cooperative Bank’s interest income reached NT$33.3 billion in 2022, a 38% increase year-over-year, and its stock price rose 20% within a year. Related financial index funds also benefited accordingly.

How Investors Can Respond

Strategy 1: Allocate to USD Assets

Since the upward trend of the USD has been established, investing in USD is the most direct way to benefit. Channels include currency exchange at banks, futures, and contracts for difference (CFDs). Small investors can consider leverage tools to amplify returns with less capital.

Strategy 2: Rebalance Stock Portfolio

In a rate hike environment, reduce holdings of high-valuation stocks (especially Tech Stocks), and increase positions in high-dividend stocks. Financial stocks tend to perform well during rate hikes due to their business characteristics and are key focus areas. Related thematic funds are also convenient options.

Strategy 3: Use Index Hedging

Taiwan’s Weighted Index and the Nasdaq are highly positively correlated. By shorting US tech indices, investors can offset losses from a decline in Taiwan stocks, providing effective protection.

Overall Outlook

The US rate hike cycle has profound impacts on Taiwan’s economy—continuous TWD depreciation, stock market pressure, capital outflows, and more. However, market cycles often reverse at extreme points. The end of a rate hike cycle usually signals a turning point, and policy shifts by the Fed may bring new investment opportunities. The key is for investors to recognize the trend and take appropriate actions at the right time.