As Expected, Big Step, Fed Slows Down... US-Korea Interest Rate Gap Up to 1.25%P

[Image source=EPA Yonhap News]

[Asia Economy New York=Special Correspondent Joselgina] The U.S. central bank, the Federal Reserve (Fed), executed a so-called ‘big step’ by raising the benchmark interest rate by 0.5 percentage points at once. However, the dot plot reaffirmed that monetary tightening will continue for the time being, projecting next year’s interest rate to rise to 5.1%. The interest rate gap between South Korea and the U.S. has expanded to 1.25 percentage points, approaching the largest level in history.

On the 14th (local time), the Fed announced after the Federal Open Market Committee (FOMC) regular meeting that it would raise the federal funds rate by 0.5 percentage points from the existing 3.75?4.0% to 4.25?4.5%. This slowed down the pace after four consecutive giant steps (0.75 percentage point hikes). As a result, the U.S. benchmark interest rate has risen to the highest level since 2007.

This pace adjustment had been anticipated for some time. Fed Chair Jerome Powell had hinted at slowing down the pace as early as December, and recently released inflation data indicated that the worst phase might be over. At the press conference that day, Chair Powell said, "Now, the speed of hikes is not as important as the level of the terminal rate," adding, "How long to maintain the tightening stance will also be an important question."

Along with the pace adjustment, the Fed clearly conveyed a message that tightening will continue. The median terminal rate on the dot plot released that day rose from 4.6% to 5.1% for next year. This leaves open the possibility of an additional hike of about 0.75 percentage points next year. Chair Powell stated, "We will maintain the tightening stance for the time being," emphasizing, "We are not considering rate cuts until we are confident inflation will come down to the 2% target."

With the Fed’s rate decision that day, the interest rate gap between South Korea (3.25%) and the U.S. widened to 1?1.25 percentage points. This is close to the largest historical U.S.-Korea interest rate inversion margin of 1.50 percentage points. Consequently, concerns over foreign capital outflows and depreciation of the Korean won have intensified. However, the burden on the Bank of Korea to raise rates is expected to ease somewhat. The market anticipates that the Bank of Korea’s Monetary Policy Committee will raise rates by 0.25 percentage points at the monetary policy meeting on January 13 next year.

The New York stock market closed lower across the board. The more hawkish-than-expected stance dampened market hopes for a pivot. The Nasdaq index, which is sensitive to interest rates and tech stocks, fell 0.76% compared to the previous session. Gina Volbin, CEO of Volbin Asset Management, said, "Investors did not see the same hope as the previous day when they cheered signs of inflation slowing from the Fed’s decision," adding, "The hope for a Santa rally has collapsed."

In the Korean stock market, investor sentiment weakened as well, with the KOSPI starting lower on the morning of the 15th. The won-dollar exchange rate rose compared to the previous session, trading in the low 1300 won range.

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