[Asking the Future of US-China Economy] "US Fed Inflation Outlook Too Optimistic... Interest Rate Hikes Will Accelerate"

Professor Son Sung-won of Loyola Marymount University: "South Korea's Hasty Interest Rate Hikes Have Significant Side Effects"
May Face a Crossroads Between the US and China in the Economy

[Asia Economy New York=Correspondent Baek Jong-min] Son Seong-won, a professor at Loyola Marymount University and CEO of SS Economics, regarded as one of the top economic experts on Wall Street, expressed concerns that the U.S. Federal Reserve's (Fed) inflation outlook is overly optimistic and predicted that the timeline for interest rate hikes could accelerate.

He also pointed out that if South Korea raises its benchmark interest rate too quickly compared to the U.S., side effects could occur.

He emphasized that South Korea may face a situation where it must choose between the U.S. and China not only in terms of security but also economically.

In a phone interview with Asia Economy on the 16th (local time), Professor Son said, "The U.S. interest rate hike could come earlier than the Fed's dot plot forecast for 2023." He added, "The Fed's inflation forecasts have been wrong in the past," and projected that next year's U.S. consumer price inflation could reach 3-4%. On the same day, the Fed presented a 2.1% inflation rate for next year.

Professor Son predicted, "If inflation is not controlled by the second half of this year, the timing of the rate hike could be brought forward."

However, he believes that even if interest rates rise, long-term rates will remain at low levels.

This is because it would be politically burdensome for the Fed to implement rapid rate hikes while the U.S. administration has announced large-scale infrastructure investments.

Professor Son also said that fears about tapering, which will precede rate hikes, are exaggerated. He believes that this situation will lead to a rise in global asset markets over the next 2-3 years, but the bond market will detect the crisis first.

He particularly pointed out high risks in junk bonds and bonds from developing countries. Regarding South Korea's economic situation, he expects that the ongoing current account surplus and sufficient foreign exchange reserves will prevent instability even if a crisis occurs. However, due to delays in COVID-19 vaccination, he assessed that rapid economic growth like that of the U.S. would be difficult to expect. Nevertheless, he forecasted favorable conditions for the next 1-2 years based on the growth of China and the U.S.

Regarding the recent hints of interest rate hikes by the Bank of Korea, Professor Son said, "It is the right direction," but advised against raising rates too early compared to the U.S. Considering the uncertainties arising from the COVID-19 crisis recovery process, he suggested that preemptive rate hikes could be harmful. He explained that discussions about rate hikes are sufficient for now.

Professor Son emphasized, "Household debt is important, but monetary policy should be based on the macroeconomy." He also noted positively that South Korea, having succeeded in quarantine compared to the U.S. and Europe, is not in a situation where it needs to stimulate the economy by distributing government budgets. He proposed that the Korea-U.S. relationship should establish a new turning point economically beyond security.

Professor Son evaluated that while it is best for South Korea to maintain good relations with both the U.S. and China, that era is now over. He explained that security is the most important issue for South Korea, and China cannot be a partner in terms of security.

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