The US Fed’s Half-Point Rate Hike Makes the Gap Between the US and Korea Even Bigger

US Federal Reserve
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As expected, the Federal Reserve of the United States increased its benchmark interest rate by a half point. The difference between Korea and the United States has expanded, which may cause a flight of capital and exchange rate fluctuations.

At the end of a two-day meeting, the Federal Open Market Committee decided to boost the target range for the federal funds rate from 4.25 percent to 4.5 percent, a change of 50 basis points.

Many people are wondering whether the central bank would slow the pace of its monetary policy hikes to bring it in line with the United States or if it will keep pushing the hikes to narrow the gap between the two nations.

After two “big step” movements of 0.5 percentage point increases in July and October, the Korean central bank lowered the pace of rate hike to 0.25 percentage point at its current meeting held on November 24.

There is now cause for worry about potential capital outflow and currency volatility as the interest rate gap between Korea and the US widens from 0.75 to 1.25 percentage points.

This is the widest rate differential between the two countries since October 2000, when the US interest rate was 1.5 percentage points higher than Korea’s.

Finance Minister Choo Kyung-ho said in a meeting with senior financial regulators on Thursday that after hearing the FOMC’s pronouncements, the US may have reduced the speed of its rate rise since the US consumer price index has declined for five consecutive months.

In Choo’s opinion, the Korean economy is “being stabilized,” supported by predictions on the speed of the US rate rise and monetary policies, despite the fact that uncertainty is still quite high.

In a separate meeting, BOK Senior Deputy Governor Lee Seung-heon said, “With the rate hike widening the differentials in interest rates between Korea and the US, we will keep an eye on the local financial, foreign exchange markets and take timely measures to stabilize the market if volatility grows.”

Governor of the Bank of Korea Rhee Chang-yong was there, as well as the chairman of the Financial Services Commission Kim Ju-hyun, the head of the Financial Supervisory Service Lee Bok-hyun, and the senior presidential secretary for economic matters Choi Sang-mok.

At a press conference after a Federal Reserve meeting, Chair Jerome Powell noted “a welcome slowdown in the monthly rate of price rises” in the inflation numbers for the months of October and November. However, “considerably more data” is needed before believing inflation is on a declining trend.

Despite the fact that the Federal Reserve has maintained its rate hike, market expectations on monetary easing have increased over the past six months as the pace has slowed compared to the previous four “giant step” moves, involving a rate hike of 75 basis points, signaling the assessment that US inflation has passed its peak.

The Bank of Korea’s New York branch said following the news that “major investing banks are predicting the Federal Reserve may not continue its tightening monetary stance since Powell’s press conference was considered to be less-hawkish.”

As the war on inflation is far from done, however, the rate is expected to rise during the following year, with no decreases expected until 2024. The Federal Reserve raised its forecast for the end point of rate rises, saying that the “terminal rate” would reach 5.1 percent in 2019 rather than the 4.9 percent predicted in September.

Powell warned that “historical experience advises against hastily relaxing policy.” It is predicted by experts that the Federal Reserve will change its monetary policy in 2024.

According to KB Securities analyst Kim Sang-hoon, “the Fed’s scenario is inflation control without causing a recession.” It’s expected that the Fed would hold interest rates steady in 2023 and reduce them by 100 basis points between then and 2025.

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