US exit strategy and the global economy

U.S. Federal Reserve’s announcement of the postponement of U.S. exit strategy pushed up the stock market only for one day. With the Federal Reserve’s decision, the timing of U.S. exit will be determined by U.S. Congress next month at the negotiation table for sovereign debt limit.

At the New York Stock Exchange Friday, the Dow Jones Industrial Average dropped 1.19 percent from the previous day to 15,451.09. Dow Jones Index rose 0.95 percent on Wednesday, a day after the announcement, and fell 0.26 percent on Thursday.

Federal Reserve Chairman Ben Bernanke said at a news conference held right after Federal Open Market Committee, “We maintain quantitative ease because we do not have a confidence in economic index. If the economic recovery becomes more promising, we may decide to roll up quantitative ease from the end of this year.” Experts say that the Federal Reserve decided to postpone the exit strategy because political and economic conditions are unclear over 2014 budget negotiation and sovereign limits which will be terminated in the mid October.

Alan Blinder, a professor at Princeton University, said, “A greater risk of the U.S. economy than the current exit strategy is political confusion due to negotiation over sovereign debt limits,” adding, “Negotiation over sovereign debt limits will once again hit the market, which reduced US credit rate two years ago.” He also said, “When Janet Yellen succeeds Ben Bernanke as Federal Reserve Chairman, Yellen will maintain keynote policy.”

The Korean government announced Thursday at the International Finance Center that it decided to respond preemptively by checking the global financial market in order to minimize negative effect to the Korean economy.

Eun Seong-su, an assistant deputy minister of the Strategy and Finance Ministry, said, “The decision by U.S. Federal Reserve seems to have worked positively to the market. But we need to be vigilant because the Reserve is still cautious about economic recovery and the contraction of quantitative ease and economic uncertainty continue.” The government will hold a meeting over macro economy and finance along with Financial Services Commission, Financial Supervisory Service, Bank of Korea and Korea Center for International Finance, which will be conducted by Chu Gyeong-ho, first deputy Minister of the Strategy and Finance Ministry on Sunday.