U.S. Fed takes another giant step

The U.S. Federal Reserve has taken a giant step by raising key interest rates by 0.75 percentage points for a second month. The base interest rate in the U.S., which stands at 2.25-2.5 percent, is now higher than that of South Korea (2.25 percent), bringing back the interest rate reversal in two years and five months since February 2020. Against this backdrop, the Fed’s rate hike is likely to cause a ripple effect in the Korean economy, including the possibility of capital outflows.

The Fed on Wednesday held the FOMC where it decides on benchmark interest rate and unanimously decided to raise interest rates by 0.75 percentage points. The rate hike for two consecutive terms is the first in 42 years since 1980, and the unanimous rate hike decision is also the first since 2005.

Also, the Fed implied another ‘giant step’ in September, citing ongoing concerns about inflationary pressures despite consecutive rate hikes. “The unemployment rate has remained low, but inflation is too high,” said Fed Chair Jerome Powell, indicating that the Fed will continue to raise rates. However, with the possibility of two quarters of negative GDP growth in the second quarter of the year, following the first quarter, there is criticism that the Fed’s decision to quickly increase interest rates may provoke recession.

Stocks rose in Korea and the U.S. on the day as the stock markets were already in anticipation of the Fed’s ‘giant step.’ Meanwhile, the won-dollar exchange rate dipped by 17.2 won to 1,296.1 won.


Min-Woo Park minwoo@donga.com