Fed raises rates to 5% amid banking turmoil

The U.S. Federal Reserve (Fed) raised its benchmark interest rate by a quarter percentage point on Wednesday, taking baby steps amid the continuing fallout from the banking crisis. This move marks the ninth consecutive rate hike since March 2017, bringing the U.S. interest rate from 4.50-4.75% to 4.75-5.0% to reach the upper range of 5%. This marks the largest difference in interest rates between South Korea and the U.S. over 22 years, at 1.5 percentage points.

After the Federal Open Market Committee (FOMC) meeting, Fed Chair Jerome Powell said in a press conference on the day that the decision was made to maintain confidence in the stability of prices while considering the option of keeping the rates frozen.

During a Congressional hearing two weeks ago, Powell stated that the Fed would raise its interest rate outlook for this year. Still, the mid-range estimate of the year-end interest rate in the FOMC’s dot plan remained unchanged at 5.1% (5.0-5.25%), the same as the forecast made in December last year. Pundits suggest that the Fed signaled a possible end to interest rate hikes due to concerns about credit tightening amid the banking crisis. Nonetheless, Powell cautioned against any optimism of a policy shift or a pivot, clarifying that “there would be no rate cut coming this year.”

The Fed’s decision has brought some relief to the Bank of Korea. However, the interest rate gap between South Korea and the U.S. is expected to widen up to 1.75% and increase the burden on monetary policy should the Fed decide to raise rates again at the FOMC meeting in May. On the day of the announcement, the exchange rate of the Korean won against the U.S. dollar dropped 29.4 won to close at 1,278.3 won (from 1307.7 won of the previous day) thanks to the expectations that the Fed’s tightening policy is being phased out.


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