[Opinion] Sticky, Bumpy, Stop & Go

'Sticky' Interest Rates, 'Bumpy' Inflation
Central Bank's 'Back-and-Forth' Caution

It is truly "sticky." It does not flow smoothly. This is about U.S. interest rates. The U.S. benchmark interest rate remained at a low level for a long time, hovering at 0.25% from early 2020 until early 2022. This was a low crawl in response to COVID-19. Along with rate cuts, quantitative easing was also implemented, directly injecting money into the economy. However, this caused side effects such as excessive overheating in the financial markets. The U.S. Federal Reserve (Fed) began tightening the money supply from early 2022. With dazzling steps like the Giant Step (0.75 percentage points), Big Step (0.5 percentage points), and Small Step (0.25 percentage points), the Fed raised rates to the 5.5% range. Defaults began to emerge in areas that had benefited from low rates, such as commercial real estate. Individuals who borrowed money to buy homes are also struggling to hold on. This is why voices calling for rate cuts have emerged.

However, the Fed is hesitant to act easily. This is because the U.S. economy remains hot, with strong employment and inflation. Therefore, opinions on rate cuts are sharply divided both within the Fed and among various experts.

The background is a "bumpy" road. Inflation and related indicators are fluctuating. Jerome Powell, Chair of the U.S. Fed, said at a press conference following the Federal Open Market Committee (FOMC) meeting on the 20th of last month (local time), "We have seen 'bumpy' inflation indicators over the past two months. It will continue to be a 'bumpy' journey." Two days later, Lee Chang-yong, Governor of the Bank of Korea, echoed Powell's remarks, saying, "Inflation is currently coming down a very 'bumpy' road." (There was reportedly some debate within the Bank of Korea over how to interpret 'bumpy.' Alternatives like 'odoltodol' (rough) or 'back and forth' were considered. Although 'bumpy' has often been translated as '울퉁불퉁' in the past, the recent debate likely reflects an effort to find a new expression.)

At present, the prevailing view is that the U.S. Fed will cut rates about three times this year. Therefore, attention is focused on the FOMC meeting scheduled for April 30 to May 1. However, the possibility of a rate cut at this meeting is low. On the 10th (local time), U.S. consumer prices for March jumped to the mid-3% range, marking the highest level in six months. In the FOMC minutes released that day, Fed officials stated that "rate cuts are inappropriate until there is confidence in 2% inflation." These remarks reflect awareness of the 'bumpy' inflation path.

Recently, the Wall Street Journal (WSJ) expressed concerns about the 'stop & go' nightmare of the 1970s. At that time, the U.S. Fed raised and lowered rates repeatedly, which instead stimulated inflation. Powell said at last month's FOMC, "Past monetary policy cases teach us that a cautious approach is necessary to avoid cutting rates prematurely and then having to raise them again." This indicates a determination to avoid repeating past mistakes.

Currently, the interest rate gap between the U.S. (5.50%) and South Korea (3.50%) is 2 percentage points. Considering concerns about capital outflows and real estate price stimulation, it is unlikely that South Korea will cut rates before the U.S.

The Bank of Korea will hold a Monetary Policy Committee meeting on the 12th to decide on the benchmark interest rate. A rate freeze is almost certain. At the current pace, the Bank of Korea is expected to start cutting rates no earlier than the third quarter, and possibly as late as the fourth quarter. This is a timetable that stock, bond, and virtual asset investors should keep in mind.

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