## 2023 U.S. Rate Hike Cycle Review: Deep Impact on Taiwan's Economy and Investment Markets

### Review of the Federal Reserve's 2023 Rate Hike Progress

By the end of 2023, the U.S. Federal Reserve had completed a more than 18-month aggressive rate hike cycle. Since initiating rate hikes in March 2022, the benchmark interest rate jumped from near zero to a high of 5.00%–5.25%, with a total increase of 20 basis points (500 basis points). This cycle of rate hikes was unprecedented in speed and magnitude in the past decade — with four consecutive 75 basis point increases in June, July, September, and November 2022, creating a level of intensity that kept markets on their toes.

**What is the root cause of all this?** In June 2022, U.S. inflation hit a 40-year high, forcing the Fed to deploy its "big guns." Entering 2023, although inflation eased somewhat, it still remained far from the 2% target, and banking sector crises added complex variables to policy decisions.

### Multi-faceted Analysis: How the 2023 U.S. Rate Hike Affects Taiwan

**Direct Transmission through the Forex Market**

The most direct result of rate hikes is the appreciation of the U.S. dollar. The logic is simple — higher interest rates increase dollar deposit yields, prompting international capital to rush into U.S. dollar deposits in American banks. In 2022, the U.S. dollar index rose by 8.5%, a figure that says it all. Conversely, the dollar's appreciation leads to the depreciation of the New Taiwan Dollar (NTD), which has a huge impact on Taiwan's import-dependent economy.

Rising import prices follow. Over a quarter of Taiwan’s agricultural imports come from the U.S., and these goods are priced in USD. A stronger dollar means it costs more NTD to buy USD for imports. In 2022, Taiwan’s food CPI rose by 6%, with egg prices soaring by 26%, mainly due to skyrocketing import feed costs.

The Taiwan Central Bank also attempted to follow suit with rate hikes to stabilize the NTD, but compared to the Fed’s large increases, the five rate hikes totaling 75 basis points were insufficient to reverse the NTD’s downward trend.

**Concerns over Capital Outflows**

The NTD’s depreciation also triggered more severe consequences — capital outflows. Imagine the real situation of an overseas investor: converting $100,000 USD into 2.7 million NTD to buy Taiwan stocks, earning 300,000 NTD in a year, would normally be happy. But in 2022, with the NTD depreciating by 11% against the USD, 3 million NTD only converted back to about $97,000 USD, resulting in a loss. What was the outcome? Large numbers of investors began selling stocks to buy USD for self-protection, causing the stock market to become unstable. According to the Taiwan Stock Exchange, in 2022, Taiwan experienced capital outflows of $41.6 billion USD, ranking first in Asia.

**Double Pressure on the Stock Market**

Taiwan’s stock market performed poorly around the 2023 U.S. rate hike cycle, with two main reasons. First, rate hikes increased the discount rate, directly lowering corporate valuations — intrinsic value inversely correlates with market interest rates; the higher the rate, the lower the valuation. Second, rising financing costs eroded corporate profits, further dragging down stock prices. In 2022, Taiwan’s weighted index fell by 21%, ranking as the sixth worst globally.

However, it’s worth noting that in the second half of 2023, as the rate hike cycle neared its end, market expectations shifted toward the Fed halting rate increases or even cutting rates, leading to a rebound in Taiwan stocks. This reminds us that the impact of rate hikes on the stock market is not linear; expectations often influence outcomes more than reality.

**Opportunities in Financial Stocks and High-Yield Assets**

Not all stocks were hit hard by rate hikes. Financial stocks, on the contrary, benefited — rate hikes widened banks’ deposit-lending spreads, significantly boosting net interest income. For example, Taiwan Cooperative Bank’s interest income reached NT$33.3 billion in 2022, up 38% from the previous year, and its stock price rose 20% over the year. This offers investors a lesson: in a rising rate environment, adjusting portfolios toward high-yield assets can turn risks into opportunities.

**Complex Relationship between Gold and Bonds**

Gold and interest rate expectations tend to move inversely. When markets anticipate aggressive rate hikes by the Fed, gold faces downward pressure; conversely, if expectations shift toward slowing hikes or rate cuts, gold prices tend to rise. Therefore, rate hikes are not necessarily bearish for gold; the key lies in market expectations of Fed policy direction. Bonds are more straightforward — rate hikes lead to rising interest rates, and bond prices move inversely to rates. The banking crises early in 2023 were partly caused by banks suffering from bond value declines.

### Strategies for Ordinary Investors

In response to the chain reactions triggered by the 2023 U.S. rate hikes, investors can consider the following approaches:

**Step 1: Capitalize on the USD Appreciation**

Since rate hikes push up the USD, it’s wise to invest in USD. There are many ways — currency exchange through banks is the most direct but costly; futures and CFDs(CFD) offer more flexible leverage tools, allowing small capital to participate. For investors with limited funds, CFDs are advantageous due to low entry barriers and high leverage, enabling larger exposure with minimal principal.

**Step 2: Optimize Stock Allocation**

Reduce holdings of high-valuation stocks (especially Tech Stocks), and increase weights in financial stocks and high-yield dividend stocks. This is not about fleeing the stock market but making smarter choices in a rising rate environment. Related financial stock ETFs are also good alternatives to reduce individual stock risk.

**Step 3: Use Short Selling for Hedging**

Taiwan’s stock market is highly positively correlated with U.S. Tech Stocks. During potential downturns, shorting the Nasdaq 100 index can effectively hedge against declines in Taiwan stocks, helping to manage portfolio risk.

### Conclusion

The impact of the 2023 U.S. rate hike cycle on Taiwan is comprehensive — NTD depreciation, rising import prices, capital outflows, and increased corporate financing costs. But reaching the end of a cycle doesn’t necessarily mean despair; the tail end of a rate hike cycle often breeds new opportunities. As long as investors can accurately grasp the rhythm of rate changes, and flexibly allocate assets in three directions — USD appreciation, financial stock gains, and hedging tools — they can profit during the cycle. The key is to remember: rate hikes are not forever; cycle reversals often occur as expected, and those who position early often enjoy the final laugh.