The 2024 US Rate Hike Cycle: Challenges and Opportunities for Taiwan's Economy

Federal Reserve Rate Hike Process Review

Since the start of rate hikes in March 2022, the Federal Reserve has cumulatively raised interest rates by 200 basis points, with the benchmark rate range climbing from 0-0.25% to 5.00%-5.25%. This cycle of rate hikes has been unprecedented — at every one of the ten Federal Open Market Committee meetings, rates were increased, especially from June to November 2022, when four consecutive hikes of 75 basis points each set a historic record. The driving force behind all this was the inflation crisis that peaked in June 2022, with the US Consumer Price Index reaching a 40-year high.

Although inflation has shown signs of easing, it remains above the 2% policy target. Coupled with concerns over financial stability following the banking crisis in 2023, markets generally expect the Fed to continue adjusting policy rates into 2024.

Overview of the Federal Reserve Policy Schedule in 2024

Based on market expectations (CME FedWatch data), here are the key dates and projected interest rate paths for the Fed in 2024:

How Do Rate Hikes Affect Financial Assets?

Chain Reaction in the Forex Market

Rate hikes strengthen the US dollar’s appeal. When US bank deposit rates increase, international investors rush to buy dollars for higher returns, pushing the dollar higher. The USD Index rose by 8.5% in 2022, exemplifying this. As the dollar strengthens, other currencies come under pressure — the Taiwan dollar against the US dollar becomes harder to maintain, and capital flows further into dollar-denominated assets.

Valuation Pressure on the Stock Market

Rate hikes exert a dual impact on stocks. First, higher interest rates directly lower corporate valuations — in financial asset pricing models, interest rates and asset prices are inversely related; the higher the rate, the lower the valuation. Second, rising financing costs erode profit margins, putting downward pressure on stock prices. This dynamic was clear in 2022 — the S&P 500 fell by 17%, and the tech-heavy NASDAQ plunged by 30%.

Entering 2023, the stock market rebounded as investors began to anticipate the end of the rate hike cycle. However, this also reminds us that stock market movements are influenced by complex and diverse factors; rate hikes are just one piece of the puzzle.

The Opposite Movements of Gold and Bonds

Gold prices tend to move inversely to rate hike expectations. When the Fed signals stronger rate hikes, gold prices weaken; conversely, when rate cut expectations emerge, gold is favored. Gold continued to decline before November 2022, then rebounded as expectations shifted.

The bond market reacts more directly — rising rates push up market interest rates, causing bond prices to fall reactively. A part of the 2023 US banking crisis stems from this: banks hold large bond portfolios, and rate hikes lead to unrealized losses on bonds. Coupled with deposit withdrawal pressures, banks are forced to sell bonds at low prices, creating a vicious cycle.

Economic Impacts on Taiwan

Chain Reaction of TWD Depreciation

US rate hikes → US dollar appreciation → Taiwan dollar depreciation, an inevitable economic consequence. A stronger dollar means the same amount of TWD can buy fewer USD, increasing import costs.

The most direct manifestation is rising inflation. In 2022, Taiwan’s consumer price index for food rose by 6%, with eggs soaring by 26%. This is no coincidence — rising feed costs are the main reason, as feed ingredients like corn and sorghum are highly imported. The US, as Taiwan’s most important agricultural supplier (accounting for 22.8%), settles trade in USD, so a stronger dollar directly raises import costs.

Although Taiwan’s central bank has also raised interest rates, with a total increase of 75 basis points in 2022, this is insufficient compared to the aggressive moves of the Fed, and cannot prevent the depreciation of the TWD.

Capital Outflow Concerns

Currency depreciation triggers a second problem: capital flight. Imagine an overseas investor: exchanging $100,000 for 2.7 million TWD to invest in Taiwan stocks, with annual profits of 300,000 TWD. But if the TWD depreciates by 11%, then 3 million TWD can only be exchanged for $97,000 — a real loss! Under such circumstances, rational investors would sell stocks for cash and buy USD to hedge risks. When most investors act similarly, the stock market inevitably experiences turbulence and decline.

In 2022, Taiwan’s stock market saw capital outflows of $41.6 billion, ranking first in Asia and accounting for over 70% of total outflows. The Taiwan Weighted Index fell by 21%, ranking sixth from the bottom globally.

Divergence of Taiwan Stock Market During the Rate Hike Cycle

The negative impact of rate hikes on Taiwan stocks mainly comes from two channels: US dollar appreciation leading to capital outflows, and domestic rate hikes by the central bank causing local interest rates to rise and corporate valuations to decline.

However, not all stocks are under pressure during rate hikes. Financial stocks, especially banks, often benefit from rising interest rates. The reason is straightforward — rate hikes expand banks’ net interest margins, directly increasing net interest income. For example, Taiwan Cooperative Bank’s interest income grew by 38% to NT$33.3 billion in 2022, and its stock price rose by 20% during the same period, demonstrating this logic.

Additionally, high-dividend-yield stocks (such as traditional manufacturing and utilities) tend to be more resilient during rate hikes because their stable cash flows become more attractive in a high-interest environment.

Investor Strategies

First Layer: Positioning in USD Assets

During a rate hike cycle, USD appreciation is highly likely, making USD allocation the primary strategy. Traditional currency exchange and USD fixed deposits are conservative options, but offer limited returns. For investors seeking higher efficiency, derivatives provide more flexible deployment options.

Second Layer: Adjust Stock Portfolio

Based on how rate hikes impact different sectors, reduce holdings of high-valuation stocks (especially tech stocks) appropriately, while increasing positions in financial stocks and high-dividend-yield stocks. This is not about abandoning stocks altogether but about dynamic balancing.

Third Layer: Establish Hedging Positions

Taiwan stocks are highly correlated with US stocks. Using short positions on NASDAQ-100 futures or related derivatives can effectively hedge against local stock declines, balancing risk control and return protection.

Grasping the Rhythm of the Rate Hike Cycle

Rate hikes are not a permanent trend. Historical experience shows that reversals often occur at the end of a rate hike cycle. The 2024 Fed policy path hints at possible rate cuts, which will lead to re-pricing of asset prices.

For investors, the key is not to predict exactly when rate hikes will end but to dynamically adjust strategies based on actual data. The pressure from US rate hikes on Taiwan is real, but it also creates structural opportunities for savvy investors. In this cycle, risks and returns often coexist.