US Fed's 4 Consecutive Giant Steps... Maximum 1.0%P Interest Rate Gap Between Korea and US

[Image source=Reuters Yonhap News]

[Asia Economy New York=Special Correspondent Joselgina] The U.S. central bank, the Federal Reserve (Fed), has implemented the so-called 'Giant Step' of raising the benchmark interest rate by 0.75 percentage points four consecutive times.

On the 2nd (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 3.0?3.25% to 3.75?4.0%. This extraordinary four consecutive Giant Steps were decided as inflation showed little sign of easing despite high-intensity tightening.

The FOMC stated that "sustained rate increases are necessary to maintain a sufficiently restrictive policy stance to return inflation to the 2% target." It also pointed out that "Russia's invasion of Ukraine has caused tremendous human and economic hardship," and "events related to the war are adding upward pressure on inflation and burdening the global economy."

Regarding the pace of rate hikes, it added, "We will consider the cumulative tightening of monetary policy, the lagged effects of monetary policy on economic activity and inflation, and economic and financial developments," and stated that "we are prepared to adjust monetary policy appropriately if risks arise," indicating the possibility of future policy adjustments.

This 0.75 percentage point increase was a step anticipated by the market. The September Consumer Price Index (CPI) released last month showed an 8.2% increase compared to the same month last year, raising concerns about entrenched inflation, and recent employment data supported a strong labor market.

Accordingly, the interest rate inversion gap between South Korea (3.0%) and the U.S. widened to a maximum of 1.0 percentage point. This is at the same level as from March 2018 to February 2020, raising concerns about future foreign capital outflows and depreciation of the Korean won.

Meanwhile, since entering the rate hike cycle by raising rates by 0.25 percentage points in March this year, the Fed has continued its tightening path with increases of 0.5 percentage points in May, 0.75 percentage points in June, 0.75 percentage points in July, and 0.75 percentage points in September.

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