[Weekly Review] US 3 Consecutive 'Giant Step'... Korea-US Interest Rate Inversion

[Image source=Yonhap News]

[Asia Economy Sejong=Reporter Son Seon-hee] The U.S. Federal Reserve (Fed) has implemented a third consecutive 'giant step' (a 0.75% increase in the benchmark interest rate at once). As a result, the interest rate differential between Korea and the U.S. has reversed again within a month, raising concerns about capital outflows.

On the 21st (local time), the Fed announced after the Federal Open Market Committee (FOMC) regular meeting that it would raise the benchmark interest rate by 0.75 percentage points. This high-intensity tightening was taken as U.S. inflation showed little sign of easing. Accordingly, the benchmark interest rate, which was 2.25?2.50%, was raised to 3.00?3.25%. This marks the fifth consecutive increase since March, with the last three being giant steps. As a result, the U.S. benchmark interest rate reached its highest level in 14 years and 8 months since January 2008.

In the statement, the Fed explained the reason for the rate hike, saying, "Inflation remains elevated due to pandemic-related supply and demand imbalances, higher food and energy prices, and broader price pressures," and added, "(The Russia-Ukraine) war and related events are exerting additional upward pressure on inflation and weighing on global economic activity."

The Fed is expected to maintain this high-intensity tightening stance for the time being. FOMC members forecast the year-end interest rate level at around 4.4%, making it highly likely that the remaining two FOMC meetings (November and December) will also see giant steps or at least 'big steps' (0.5 percentage point increases).

Fed Chair Jerome Powell also said at a press conference immediately after the FOMC regular meeting, "According to my and the FOMC's view, there is a long way to go," and "We will not consider cutting rates until we are very confident that inflation is moving down toward the Fed's 2% target."

As a result, the U.S. benchmark interest rate has once again surpassed Korea's (2.50%) after about a month. The interest rate gap between the two countries is 0.75 percentage points. Given the rapid rate hikes in the U.S., it seems difficult for the Bank of Korea to keep pace even if it raises rates at the remaining Monetary Policy Committee meetings in October and November.

If the U.S. benchmark interest rate continues to significantly exceed Korea's, there is a greater possibility of foreign investors withdrawing funds and the Korean won depreciating sharply.

In this regard, on the 22nd, Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho held an emergency macroeconomic and financial meeting, stating, "The current economic team is closely monitoring the impact on financial and foreign exchange markets and the real economy under various scenarios, including the Fed's high-intensity tightening, accelerated economic slowdown in China, and rising risks in emerging markets, while tracking key indicators that can detect signs of crisis in real time." He emphasized, "Based on past economic and financial crisis policy response experiences, we have comprehensively and systematically prepared available policy tools for rapid deployment and will implement market stabilization measures by sector and stage in a timely manner if necessary."

He also said, "The Ministry of Economy and Finance, Bank of Korea, Financial Services Commission, and Financial Supervisory Service will respond to the current situation under close cooperation with a 'broad and long-term perspective' and seek the 'optimal policy mix' with an eye on trends beyond next year." This appears to be a remark considering the possibility of the U.S.'s high-intensity tightening continuing for a longer period.

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