Like the US Fed?…Can the Bank of Korea Also Manage the Unemployment Rate (Comprehensive)

Fed Signals Role as Employment Fighter
Indicates Prolonged Low Interest Rates

Bank of Korea Unlikely to Add Employment to Mandate Easily
Conflicts with Inflation and Financial Stability Goals... Different Economic Structure from US Requires Study

Jerome Powell, Chairman of the U.S. Federal Reserve (Fed), is delivering a speech at the virtual Jackson Hole conference in Wyoming. [Image source=EPA Yonhap News]

[Asia Economy Reporter Eunbyeol Kim] As the U.S. Federal Reserve (Fed) announced on the 27th (local time) its intention to pursue monetary policy as an 'employment fighter,' attention is turning to whether the Bank of Korea (BOK) will also add employment to its policy goals. The COVID-19 pandemic has lasted longer than expected, worsening corporate conditions and making an employment cliff inevitable, according to experts. The BOK expects the number of employed persons this year to decrease by 130,000 compared to last year, and the unemployment rate to rise to 4.1%.

Professor Jinil Kim of Korea University, a former Fed economist, said, "Judging from Fed Chair Jerome Powell spending a long time explaining the Phillips curve in his Jackson Hole speech, we can see how much the Fed has struggled with this issue. However, whether this can be introduced in Korea is a matter that requires us to first study whether similar phenomena are occurring here as in the U.S. before making a judgment."

According to Chair Powell's announcement, in the U.S., a phenomenon has emerged where inflation does not occur even when the labor market remains robust. In other words, when employment is sharply shaken, it means that maintaining a low-interest-rate stance without worrying about a future surge in prices is acceptable. However, if Korea maintains low interest rates to revive employment as in the U.S., there is no guarantee that inflation will not surge.

In Korea's case, there is also the problem that asset prices such as real estate and stocks could surge as a side effect. Concerns have already been raised that the BOK's monetary easing in response to COVID-19 has only inflated asset prices, and considering the employment situation, the low-interest-rate stance must continue. Countries in a position similar to Korea could suffer a significant shock if the asset market, which has been inflated, bursts. The 1997 Asian financial crisis and the 2008 global financial crisis are representative examples. In 2011, the BOK added 'financial stability' to the Bank of Korea Act. Within the BOK, there are also opinions that since the Fed has decided to prolong the low-interest-rate stance, leading to abundant global liquidity and concentrated investment demand, the focus should now shift more toward financial stability rather than employment.

[Image source=Yonhap News]

Besides this, although the Fed has expressed its intention to prioritize employment in monetary policy, there are concerns about trust regarding what tools can be used going forward when interest rates are already at zero. It is necessary first to confirm what means the Fed will actually use to continue accommodative monetary policy. Regarding these issues, BOK Governor Lee Ju-yeol said at a monetary policy direction press conference, "Changing the current monetary policy operation system has effects, but it is also true that there are many challenges to overcome," adding, "Since there is no perfect single alternative, we are reviewing how to change the monetary policy operation system to reflect the current trends."

Meanwhile, the BOK has long been conducting thorough research on the possibility of changing the inflation targeting system. At the monetary and credit policy report announcement in June, Deputy Governor Park Jong-seok stated, "It is expected that the low-interest-rate and low-inflation trend will not deviate significantly even after COVID-19," and "We are considering how to improve the current inflation targeting system to enhance the effectiveness of monetary policy."

The inflation targeting system is a policy where the central bank sets a medium- to long-term inflation rate target (2%) in advance and operates monetary policy accordingly. However, as the inflation rate has recently declined, controversy has arisen over whether the inflation targeting system itself is an effective policy. Deputy Governor Park cited price-level targeting (PLT) and average-inflation targeting (AIT) as examples of alternative methods to the inflation targeting system. The Fed has adopted AIT this time and decided to respond with interest rate hikes after observing the situation over several years, even if inflation temporarily exceeds the target. Given the prolonged low-interest-rate stance, the Fed plans to tolerate short-term inflation increases while maintaining accommodative monetary policy.

◇Terminology Explanation

◆Phillips Curve= A curve showing the trade-off relationship between unemployment rate and inflation rate. It implies that as unemployment falls, consumption activates, leading to inflation (price increases). Financial authorities usually face a dilemma as they must curb both unemployment and inflation, but the U.S. Federal Reserve (Fed) recently explained that this phenomenon does not actually hold true.

This content was produced with the assistance of AI translation services.