[Reporter’s Notebook] The Current High Interest Rates Are Not Just a Passing Shower

"One of the reasons we believe that interest rates will remain high going forward is employment. If employment stabilizes as it is now, there will be fewer factors to either stimulate or cool down the economy through interest rates."

A senior official from the Ministry of Economy and Finance, whom I met recently, analyzed the Federal Reserve's (Fed) decision to hold the benchmark interest rate in the 5% range in this way. The stabilization of the labor market despite high interest rates was interpreted by the market as a signal that the government’s tightening policies can be sufficiently endured.

This is easier to understand when approached from the perspective that monetary policies worldwide aim to minimize economic volatility. Despite high interest rates, if inflation remains stable and employment health is maintained, there is no reason to adjust monetary policy and increase volatility.

The global market’s anticipation of a "new normal" era of high interest rates is for this reason. It is worth reflecting on Fed Chair Jerome Powell’s statement right after the Federal Open Market Committee (FOMC) meeting that "the estimate of the neutral rate is rising." The neutral rate refers to the level of interest rates that can sustain the current economy. In the U.S., with a benchmark rate of 5.25?5.5%, inflation and employment have stabilized, suggesting the average interest rate may rise.

The new normal era of high interest rates carries complex issues. The current U.S. economic boom and prolonged Fed tightening lead to a rise in the dollar’s value. A strong dollar increases production costs for companies, which burdens the Korean economy, where manufacturing has a high share. The stock market is also inevitably impacted. The 10-year U.S. Treasury yield surpassed 4.55% on the 26th, marking the highest level in 16 years since October 2007. This explains the expanding outflow of foreign investment funds from Korea.

A bigger problem lies in the public’s perception of interest rates. There is an expectation that the high interest rate phenomenon is temporary and that the ultra-low interest rate era, which lasted over the past decade, will return. Although mortgage rates recently surpassed 7%, household loan growth has paradoxically increased, reflecting this mindset. High interest rates may last longer than expected. It is time to face the new normal era of high interest rates.

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