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U.S. Fed takes ‘big step’

Posted December. 16, 2022 07:39,   

Updated December. 16, 2022 07:39


The U.S. Federal Reserve raised interest rates by as high as 0.5 percentage points, bringing the U.S. key interest rate up to the highest level of 4.5 percent in 15 years. As the Fed has made it clear to keep the current levels unchanged throughout the following year, we will likely be long affected by the high-interest rates, the strong U.S. dollar, and the global economic downturn, all of which have been mainly attributable to Washington’s austerity measures, until the following year.

However, the rise of 0.5 percentage points is not as surprising as the 0.75-percentage-point increase made four times. The Fed slowed it down as consumer prices went down to the lower seven percent range last month after five consecutive months’ decrease. Fed Chair Jerome Powell stated that the main focus is on driving inflation down to two percent by raising interest rates, adding that the U.S. still has a long way to go, despite the growing expectations that the interest rates will go down next year. In response, global stock markets went bearish immediately.

With the Fed’s announcement, the gap between South Korea, the key interest rate of which rose to 3.25 percent last month, and the United States widened to 1.25 percentage points, recording the biggest gap in 22 years and two months. Given that the Fed will raise interest rates to 5.25 percent next year, the strong U.S. dollar will likely continue, increasing risks of foreign capital exiting emerging markets, including South Korea. As the South Korean economy is expected to grow dimly by less than two percent or record negative growth in the worst-case scenario, the country will only sink way low and have no option but to increase the burden of interest payments on the shoulders of households and businesses.

Moreover, South Korea is completely different from the United States, where unemployment rates are low enough to be considered to reach full employment, and consumption in the private sector fully supports the economy. Indebted at the worst level in history, South Korean households have already started tightening the purse strings amid rising interest rates and plummeting housing and stock market prices. Major exporters, the main columns of the national economy, are reluctant to expand investment and employment as economic downturns across the EU nations and China are approaching. Global oil prices can fluctuate anytime depending on how the ongoing war in Ukraine unfolds and whether oil-producing countries reduce production. Inflation is expected to keep pace in the five percent range until early next year due to the high won-dollar exchange rate and raw materials prices.

South Korea has already entered the worst cold spell, which is exaggerated by economic downturns and inflation. The marginalized and poor can face a more profound crisis, while businesses are likely to go bankrupt successively. The brutal battle in which the whole nation is struggling can be won only when a concerted effort is made collectively by workers, the self-employed, businesses, and politicians to endure hardship patiently and practice mutual understanding and sharing.