Monetary Crisis Based On Recent U.S. Federal Reserve Decision

The U.S. Federal Reserve on Wednesday (local time) cut the Federal Fund rate, similar to Korea`s overnight call rates, 0.25%. As a result, the Federal Fund rate went down to 1.00 percent, its lowest level since 1958.

The Federal Open Market Committee confirmed the lowering of the Federal Fund rate for overnight loans during the second day of the policy meeting Wednesday, saying that “inflation is more worrisome than deflation.” It was its 13th drop in interest rates since the U.S. fell into recession in January 2001.

"The economy, nonetheless, has yet to exhibit sustainable growth," the FOMC said in its statement. “With inflationary expectations subdued, the committee judged that a slightly more expansive monetary policy would add further support for an economy which it expects to improve over time."

Right after the announcement, disappointment hit hard on the U.S. stock markets leading to sell offs as the interest rate drop did not reach the expected 0.5 point and the Dow Jones Industrial Average dropped to 1.08 percent to close at 9,011.53.

In Japan, the call rate applied for very short-term financial transactions dropped to below zero for the first time, a weird phenomenon where the lender has to pay interest to the borrower.

The Bank of Japan announced that the weighted rate average for the overnight call fund, the representative index for short term interest rates, was recorded at –0.001%. This can be interpreted that the overflowing influx of capital into the market due to expanded monetary supply by the Bank of Japan and the lack of investment among businesses due to long term depression and, moreover, failure of the financial market of its functions affected by a credit level drop for financial institutions would have been likely another cause.

parkwj@donga.com ecopark@donga.com