Powell Hints at 'Interest Rate Hold'... Bank of Korea Expected to Hold Rates for Third Consecutive Time Next Week

US Debt Ceiling Negotiations Delayed Again... Market Anxiety

Jerome Powell, Chairman of the U.S. Federal Reserve (Fed) [Image source=Yonhap News]

As negotiations to adjust the U.S. debt ceiling have temporarily stalled, Federal Reserve (Fed) Chair Jerome Powell's remarks suggesting a 'pause in interest rate hikes' have caused market confusion. Ahead of next week's Monetary Policy Committee meeting, the Bank of Korea is expected to maintain the benchmark rate for the third consecutive time.

On the 19th (local time), negotiations between U.S. President Joe Biden and the opposition Republican Party to raise the federal government's debt ceiling once again reached an impasse and were temporarily suspended. The U.S. Treasury Department's mentioned default deadline (June 1) is about two weeks away, but no breakthrough has been found yet.

Earlier, markets had been reassured when President Biden and House Speaker Kevin McCarthy stated that "there will be no U.S. default." However, the New York stock market fluctuated again. The Dow Jones Industrial Average fell 0.33% from the previous close, and the Standard & Poor's (S&P) 500 index dropped 0.14%.

Meanwhile, Chair Powell signaled that the Federal Open Market Committee (FOMC) meeting scheduled for June 13-14 would not raise the benchmark interest rate. During a discussion at the Thomas Laubach Research Conference held in Washington D.C. on the 19th (local time), he focused more on banking sector instability and economic slowdown rather than inflation.

He said, "Given where we are, we have the luxury of making a cautious assessment as we observe data and the gradually evolving outlook," adding, "We may not need to raise the policy rate that much to achieve our goals. Of course, how much that is remains very uncertain."

This approach differs somewhat from recent hawkish comments by Fed officials. Earlier, James Bullard, President of the St. Louis Fed and a hawk, said, "The pace of inflation slowdown is slower than expected," and Lori Logan, President of the Dallas Fed and a centrist, also stated that economic indicators have not yet reached a level to justify pausing rate hikes.

Although some Fed officials said a rate pause would be insufficient, Chair Powell's remarks on this day were interpreted as signaling that due to instability in the banking sector worsening lending conditions, which could affect economic growth, employment, and inflation slowdown, a rate hike at the June FOMC may not be necessary.

Lee Chang-yong, Governor of the Bank of Korea [Image source=Yonhap News]

According to the CME Group's FedWatch tool, the market's probability of a Fed rate pause next month rose from 64.4% last week to 82.6% currently. However, some foreign media outlets assessed that depending on economic data results before the FOMC, the Fed might raise rates once more.

Despite uncertainty in domestic and international markets, the Bank of Korea is highly likely to keep the benchmark interest rate unchanged at 3.5% per annum at the Monetary Policy Committee meeting on the 25th. This meeting is significant as it is the first with new MPC members Park Chun-seop and Jang Yong-seong and will decide whether to maintain the rate for the third consecutive time.

While the U.S. continues raising rates, South Korea has decided to hold rates steady twice in a row, widening the Korea-U.S. benchmark rate gap to a record high of 1.75 percentage points. However, unlike last year, the won-dollar exchange rate remains relatively stable around the 1,300 won level, and foreign capital outflows are not severe.

Most importantly, given the unfavorable domestic economic conditions, further rate hikes are unlikely. The Bank of Korea initially projected 1.6% economic growth for this year but is expected to revise this downward in the upcoming economic outlook update. International credit rating agency Moody's lowered South Korea's growth forecast from 1.6% in March to 1.5% yesterday.

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