US Fed Takes 4 Consecutive Giant Steps, Also Signals Speed Adjustment (Update)

[Image source=Reuters Yonhap News]

[Asia Economy New York=Special Correspondent Joselgina] The U.S. central bank, the Federal Reserve (Fed), has implemented a so-called 'Giant Step' by raising the benchmark interest rate by 0.75 percentage points four consecutive times. However, it also confirmed that it may adjust policies in the future if necessary, stating that it will "consider the cumulative tightening policies and their impact on the economy" during the rate hike process.

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 unprecedented four consecutive Giant Steps were decided as inflation showed little sign of easing despite the high-intensity tightening.

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

This 0.75 percentage point hike was a step anticipated by the market. The September Consumer Price Index (CPI) released last month rose 8.2% year-on-year, raising concerns about inflation entrenchment, and recent employment data supported a strong labor market.

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

The most eye-catching part of the FOMC statement on this day was the indication of policy adjustment. The FOMC said, "We will consider the cumulative tightening monetary policy, the lag with which monetary policy affects economic activity and inflation, and economic and financial developments," adding, "We are prepared to adjust monetary policy appropriately if risks arise," confirming the possibility of future policy adjustments.

As the Fed sent these potential policy adjustment signals, the New York stock market rose across the board. As of 2:32 p.m. Eastern Time, the Dow Jones Industrial Average was trading 0.83% higher than the previous close. The large-cap S&P 500 index rose 0.63%, and the tech-heavy Nasdaq index increased by 0.51%.

Awaiting the results of the FOMC regular meeting, the New York stock market, which had started lower, showed an upward trend after the monetary policy statement was released at 2 p.m. The S&P 500 and Nasdaq indices, which had remained in a downtrend, turned upward simultaneously, and the Dow also slightly expanded its gains.

The market is currently watching the press conference of Fed Chair Jerome Powell, which began at 2:30 p.m. local time, with a cautious stance. Chair Powell is explaining the background of the four consecutive Giant Steps by stating, "Without price stability, the economy can do nothing." Attention is focused on whether the upcoming Q&A session will hint at a so-called slowdown policy, reducing the pace of rate hikes.

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.