Massive Increase in the US Interest Rates

The Federal Open Market Committee has announced that it will raise the interest rates by 50bp, which is the highest increase in the past years. Federal Reserve’s decision is a response to the skyrocketing inflation rates, as the 12-month percentage change in Consumer Price Index has hit 8.5%. This is the highest rate of change in the past 40 years. Compared to the inflation rates, the real Gross Domestic Product of the US has decreased at an annual rate of 1.7% in the first quarter. This may signal stagflation in the future, and many analysts are pessimistic about the global economy. The Federal Reserve aims to control the status quo by reducing the liquidity in the market by $1 trill per year and adjusting the federal funds rate to a higher target.

These responses of the Federal Reserve have an immense impact on the financial market. The exchange rates of foreign currencies have skyrocketed; the exchange rate for KRW is 1259.09 KRW per 1 USD. This is due to the deviation of capital in the Korean financial market to the US financial market, as there are many predictions that the US Federal Reserve will increase the interest rates more rapidly compared to the Korean Central Bank. 

Furthermore, the market for high-risk assets such as equities and cryptocurrencies is expected to decrease in the long run. Major NASDAQ stocks and cryptos have been declining in recent weeks, as the Federal Reserve has indicated explicitly that it is reducing liquidity. During the pandemic's previous years, the Fed kept interest rates at zero to boost the economy, and these high-risk asset markets were appealing to investors, therefore most of them exhibited an upward-sloping, although turbulent, growth. However, due to the reduced liquidity, investors are gravitating toward low-risk assets such as savings and bonds. These inflated markets are presently in a severe depression, and their prospects are bleak.