U.S. Fed raises key interest rates again 0.25bp…

The interest rate gap between Korea and the U.S. is now a historical size of 1.75bp

U.S. Fed raises key interest rates again 0.25%p…

Interest rate gap between Korea and the U.S. is now a historical size of 1.75bp

U.S. interest rates 5.00-5.25%, the highest level in 16 years…

Bank of Korea with more to worry regarding potential interest rate hike on the 25th

U.S. Fed: “Inflation is still high...

With additional strengthening policies, considering cumulative tightening”

In regard to room for leaving them unchanged,

Chairman Powell draws the line, saying,

“Inflation will not go down quickly...

Interest rate reductions are inappropriate”

The U.S., which is still suffering from pressures stemming from rise in prices, has raised key interest rates to a small extent amidst financial market uncertainty.

However, implying the possibility of suspending interest rates hikes, which have continued for over a year, the Fed encouraged expectations that interest rates might be left unchanged at the next meeting for interest rate decision planned for mid next month.

On May 3 (local time), the U.S. Federal Reserve Board (“the Fed”) released a statement immediately after the regular meeting of the Federal Open Market Committee (“the FOMC”) and announced that key interest rates would be raised again 0.25bp.

Although easing somewhat, inflation, which is not easy to tackle, has now been subject to “baby steps”(0.25bp raise of key interest rates per meeting) three times in a row.

As a result, U.S. key interest rates, which are currently 4.75-5.00%, have risen to 5.00-5.25%.

With the addition of the May raise, since March of last year, the Fed has raised interest rates 10 times in a row, and U.S. key interest rates have become the highest in 16 years since 2007.

The interest rate raise on this day was decided upon unanimously by the FOMC members.

The ceiling of U.S. key interest rates rose up to 5.25%, and now the gap in interest rates with Korea is as much as 1.75bp, which is the greatest in history. Concerns have been created about a negative impact on the Korean economy due to capital outflows.

The Bank of Korea, which froze interest rates last month, is expected to fall into deep thought over whether or not it will raise key interest rates at the last Monetary Policy Board of the first half of this year planned on May 25.

In a statement, the Fed remarked, “Economic activity expanded at a smooth pace in the first quarter.””During the past couple of months, the growth of jobs has been solid, and the unemployment rate has stayed at a low level. Inflation is still high,” it assessed.

It then went on to reveal the reason for the interest rate hike by saying, “The strict credit situation of the household and corporate sectors can possibly reduce the burden on economic activity, employment and inflation. The degree of impact is still uncertain…The Fed is very wary of inflation risk.”

In regard to financial market uncertainty due to the failure of certain banks, it sent a message of confidence, saying “The U.S. banking system is healthy and flexible.”

Previously, the Fed raised key interest rates in March of last year 0.25bp, effectively ending the age of zero interest rates that had been maintained since the COVID-19 pandemic outbreak in March 2020.

With the Ukranian War and effects from the collapse in the supply chain and other factors, prices rose rapidly, and in May of last year, the Fed raised interest rates 0.5bp, while in June, July, September and November, they took bold “giant steps” (0.75bp raise of interest rates per meeting) four consecutive times to rein in inflation.

Thereafter, as the rise in prices began showing signs of alleviating, the Fed began adjusting its speed by reducing the extent of their hikes. In December of last year, it raised interest rates 0.50bp, and in February and March of this year, 0.25bp respectively.

The most recent announcement of an interest rate hike on this day can be interpreted as the result of the reflection of the Fed’s awareness that, despite concerns over an economic recession pursuant to interest rate hikes, responding to inflation is the first and foremost task.

The Personal Consumption Expenditures Price Index (PCE), the price indicator that the Fed mostly refers to, rose most recently in March 4.2% compared to the same month of the previous year, and 0.1% compared to the previous month, respectively. Thus, the rising trend was less stark, but the number still far exceeded the Fed’s price target (2%).

The Employment Cost Index (ECI) of the first quarter of this year also rose 1.2% compared to the previous quarter. The rise in wages as of the end of March compared to the same month of the previous year is 5.0%, which is still high.

These indicators imply that inflation can be more prolonged than expected.

However, the Fed mentioned that “In determining whether additional policy strengthening is appropriate to return inflation to (the Fed’s target of) 2%, the Fed shall take into consideration cumulative tightening of monetary policy, and the time lag required for monetary policy to impact economic activity, inflation and economic/financial circumstances.”

This was inserted instead of the wording of the March FOMC statement of “a little extra policy reinforcement is expected to be appropriate”, and is interpreted as leaving room for letting future interest rates remain unchanged.

The Washington Post made the analysis that “This is an implication that there will be no further interest rate hikes,” while Thomson Reuters said “This is a sign that there will be no additional hikes.”

However, at a press conference, Jerome Powell Chairman of the U.S. Federal Reserve Board remarked, “No decision on leaving interest rates unchanged was made today,” and left things unanswered despite market expectations.

Rather, he drew the line on the possibility of interest rate cuts, saying “The FOMC members hold the opinion that inflation will not go down fast…Resolving inflation will take some time, and if such an observation is correct, interest rate cuts are inappropriate.”

In a statement, the Fed said, “If risks appear that have the potential to interfere with the attainment of our goals, we are ready to adjust our monetary policy basis as appropriate…We shall take into consideration a broad range of information including the labor market situation, inflationary pressure, expected inflation, financial/international situation.”

With these recent measures by the Fed, the gap between the key interest rates of Korea and the U.S. has widened to 1.50-1.75bp.

Despite the ongoing interest rate hikes of the U.S., the Bank of Korea’s Monetary Policy Board left key interest rates unchanged (3.50%) as recently as last month, and maintained the largest interest rate difference with the U.S. in 22 years. With the interest rate hikes just announced by the U.S. this month, the difference has expanded to the largest in history.

This means that the likelihood of foreign capital outflow in search of high profits and the potential drop in the value of the Korean Won (i.e. rise in won/dollar currency rate) has grown.

(Provided by Newsys)