## The Truth Behind Taiwan's Record Rate Hikes: Why Does the US Always Lead?

As 2024 approaches, the market is once again buzzing about an old topic—will the US continue to raise interest rates? This question may sound cliché, but for Taiwanese investors, it’s actually the most important to watch. Because every move the US makes in rate hikes directly impacts our wallets.

## The Crazy Three Years of US Rate Hikes: How Fast Did It Go from 0 to 5%?

Let’s go back to March 2022. At that time, US inflation hit its highest level in 40 years, and the Federal Reserve couldn’t sit still. They launched the most aggressive rate hike cycle in history. By the end of 2023, the Fed had raised rates by a total of 20 basis points (i.e., 500 bps), pushing the benchmark rate from 0~0.25% up to 5.00%~5.25%.

How crazy was this rate hike speed? The previous three cycles weren’t this fast. The most outrageous was in June, July, September, and November 2022, when the Fed raised rates by 75 basis points four consecutive times. Such moves are indeed "harsh," but they effectively controlled inflation—2023 inflation figures declined month by month.

## Will the Rate Hikes Continue in 2024? How the Market Views It

According to CME FedWatch predictions, the Fed is likely to further adjust rates in 2024. Although inflation has fallen from its peak, it’s still quite far from the 2% target. Additionally, the banking crisis in 2023 also sounded an alarm for the Fed—rate hikes should be moderate, not overdone.

It’s estimated that in 2024, the annual interest rate will gradually decline from 5.50% to around 4.00%. This means the Fed might hold steady in the first half of the year and consider cutting rates in the second half.

## How Rate Hikes Gradually Erode the Value of the TWD?

Many people don’t understand why US rate hikes are linked to rising prices in Taiwan. The logic is simple:

**US dollar appreciation → TWD depreciation → Imported goods price increase → Domestic inflation**

When US interest rates rise, foreign capital floods into US dollar deposits for interest, increasing demand for USD, which naturally appreciates. In 2022, the US dollar index rose by 8.5%. Meanwhile, the TWD depreciated—originally, 100 TWD could exchange for 3.7 USD; after depreciation, it might only exchange for 3.3 USD.

The problem follows. Taiwan’s economy is highly dependent on imports—agricultural products, energy, raw materials—all priced in USD. When the USD appreciates, import costs rise directly. In 2022, 22.8% of Taiwan’s imported agricultural products came from the US. When the USD appreciates, the price of a single egg or a bag of flour increases accordingly. That’s why Taiwan’s food CPI rose by 6% in 2022, with eggs soaring by 26%.

## The Dilemma of Taiwan’s Central Bank: Why Can’t Rate Hikes Stop the TWD from Depreciating?

Seeing the aggressive US rate hikes, Taiwan’s central bank also didn’t dare to slack. Since 2022, it has raised rates five times, totaling 75 basis points. But compared to the US’s 500 bps increase, this is just "a drop in the bucket."

The result? The TWD still depreciates, import prices still rise, and the purchasing power of ordinary people continues to decline. The harsh reality is—Taiwan’s central bank cannot be as aggressive as the Fed because Taiwan’s economy is more sensitive to interest rate changes. Large rate hikes could directly hurt local corporate financing willingness.

## Capital Outflows: The Second Killer of the TWD Depreciation

If inflation is the direct damage from rate hikes, capital outflows are the indirect damage.

Imagine you’re a foreign investor. You exchange $100,000 for 2.7 million TWD to buy Taiwanese stocks, earning a profit of 300,000 TWD over a year. But then you realize the TWD has depreciated by 11% against the USD. That 3 million TWD can now only buy $97,000—losing $3,000!

The most rational choice at this point is to sell Taiwanese stocks and convert back to USD to return to the US. When most people think this way, capital outflow from Taiwan’s stock market becomes a flood. Data shows that in 2022, Taiwan experienced capital outflows of $41.6 billion, ranking first in Asia.

## How Rate Hikes Differentiate Taiwan Stocks: Winners and Losers

Rate hikes hit Taiwan’s stock market in two ways: on one hand, capital outflows drag the market down; on the other, rate hikes themselves depress stock valuations. In 2022, Taiwan’s weighted index fell by 21%, ranking sixth from the bottom globally.

But this doesn’t mean there are no winners from rate hikes. On the contrary, **bank stocks, especially financial stocks, benefit from rate hikes**. The reason is straightforward: higher interest rates widen the spread between deposit and loan rates, boosting bank profits. For example, Taiwan Cooperative Bank’s interest income in 2022 was NT$33.3 billion, up 38% year-over-year, and its stock price rose 20% within a year.

Conversely, high-valuation growth stocks, like tech stocks, are hit hardest. Because rate hikes reduce the present value of future cash flows, these companies’ valuations shrink significantly.

## Gold and Bonds: "Inverse Operations"

Many think that rate hikes are necessarily bearish for gold and bonds, but it’s not always so clear-cut.

Gold’s key isn’t just rate hikes themselves, but expectations of rate hikes. When the market anticipates the Fed will accelerate rate increases, gold indeed falls; but when expectations shift toward "slowing down hikes or starting to cut rates," gold tends to rise. That’s why gold kept falling before November 2022, then continued to rally afterward.

The logic for bonds is similar. Rate hikes push up interest rates, and bond prices move inversely to rates, so bond markets perform poorly during rate hike periods. One of the roots of the 2023 banking crisis was banks holding large amounts of long-term bonds. When rates rose, bond prices plummeted, shrinking bank assets.

## How Should Ordinary Investors Respond to This Rate Hike Cycle?

Since rate hikes are the trend, what should we do? Here are some strategies worth considering:

**First, adjust your portfolio.** During rate hike cycles, high-valuation stocks are the most vulnerable. Reduce holdings in tech and growth stocks, and increase positions in financials, utilities, and high-dividend-yield assets. This way, you can earn dividends and hedge against valuation declines.

**Second, seize exchange rate opportunities.** USD appreciation is a certain gain during rate hike cycles. Investing in USD indices or going long USD/JPY and other strong USD pairs can directly benefit from USD appreciation.

**Third, consider hedging strategies.** Taiwan stocks are highly correlated with US stocks (especially the Nasdaq 100). During market pressure, shorting the Nasdaq can hedge against losses from Taiwan stocks’ decline. This approach suits investors with higher risk tolerance.

**Fourth, watch for reversals at the end of rate hike cycles.** Rate hike cycles don’t last forever. When the Fed signals rate cuts, bond markets will rebound first, and stocks will start bottoming out. Positioning early for this turning point can capture the biggest opportunities.

## Conclusion: Rate Hikes Aren’t All Bad, It’s About How to Respond

US rate hikes do impact Taiwan’s economy—TWD depreciation, rising import prices, stock market pressure, and capital outflows. But from an investment perspective, they also create new opportunities: USD appreciation, benefits for financial stocks, and the availability of shorting tools.

The key is to understand the characteristics of the rate hike cycle and adjust strategies in time. The 2024 rate hike expectations are gradually shifting toward rate cuts, and market sentiment is changing. For perceptive investors, this could be an excellent opportunity to deploy. Lastly, remember that the end of a rate hike cycle often signals a reversal—be prepared to position early.