[FOMC] US 3 Consecutive Giant Steps... Reversal of Interest Rates Between Korea and the US

[Image source=AP Yonhap News]

[Asia Economy New York=Special Correspondent Joselgina] The U.S. central bank, the Federal Reserve (Fed), took a third consecutive 'giant step' (a 0.75 percentage point increase in the benchmark interest rate) to curb persistently high inflation. This marks the beginning of the '3% interest rate era' for the first time in 14 years. With the benchmark interest rates of the U.S. and South Korea reversing again within a month, repercussions for our economy are inevitable.

On the 21st (local time), the Fed announced after the Federal Open Market Committee (FOMC) regular meeting that it would raise the federal funds rate by 0.75 percentage points from the previous 2.25-2.50% to 3.0-3.25%. This unprecedented third consecutive giant step has pushed U.S. interest rates to their highest level since January 2008.

With the Fed's third consecutive giant step, the U.S. benchmark interest rate once again surpassed South Korea's. After matching due to the Bank of Korea's 0.25 percentage point hike last month, the gap widened again to 0.75 percentage points within a month. If the interest rate inversion between Korea and the U.S. prolongs, outflows of foreign investment funds and depreciation of the Korean won are inevitable. Moreover, won depreciation is also considered a factor that fuels inflation.

Fed Chair Jerome Powell, at a press conference immediately after the FOMC meeting, stated, "We will not consider lowering interest rates until we are very confident that inflation is moving down toward the 2% target," and confirmed the policy of continued restrictive measures.

The dot plot, which shows FOMC members' interest rate hike projections, also reflects the same message. The median interest rate at the end of this year is 4.4%, up 1 percentage point from the June dot plot (3.4%). This signals an additional 1.25 percentage point increase over the remaining two meetings this year. The market is anticipating a fourth consecutive giant step.

The interest rate forecast for the end of next year was also raised to 4.6%. Notably, six out of 19 FOMC members projected rates between 4.75% and 5%, suggesting that the final rate could rise into the 5% range. The Summary of Economic Projections (SEP) released alongside also reflected Chair Powell's Jackson Hole speech message, showing a significant downward revision in growth and an upward revision in unemployment, indicating a willingness to endure pain to reduce inflation.

Amid the announcement of high-intensity tightening, the three major indices of the New York stock market all recorded losses of around 1.7%. The U.S. 2-year Treasury yield, sensitive to monetary policy, briefly surpassed 4.1% during the session, reaching its highest level since 2007. However, the 10-year yield declined amid growing concerns about economic slowdown. The dollar index, which measures the value of the dollar against the currencies of six major countries, rose more than 1% from the previous session to 111.34.

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