The Bank of Korea: "FOMC Results and China Evergrande Group Crisis May Increase Market Volatility"

[Asia Economy Reporter Eunbyeol Kim] The Bank of Korea announced that it will strengthen monitoring as volatility in domestic and international financial markets may increase due to the results of the U.S. Federal Open Market Committee (FOMC) meeting and the China Evergrande Group crisis.

On the morning of the 23rd, the Bank of Korea held a "situation check meeting" chaired by Deputy Governor Seunghun Lee and stated, "The U.S. FOMC results largely met market expectations, but attention should be paid to the fact that the timing of tapering (asset purchase reduction) may be brought forward, and the pace of the Fed's monetary policy normalization could be faster than expected."

It added, "Although the prevailing assessment is that the China Evergrande Group crisis is unlikely to transfer into a systemic risk in the international financial market, since the issue of accumulating real estate-related debt has materialized, there remains a possibility that financial market volatility could increase depending on how this situation unfolds."

Furthermore, the Bank of Korea emphasized, "As volatility in domestic and international financial markets may increase depending on future changes in the monetary policy stance of major countries such as the Fed and the development of the China Evergrande Group crisis, we plan to strengthen monitoring of financial market risk factors and continuously review response measures."

During the Chuseok holiday period, in the international financial markets, caution regarding the FOMC persisted, and concerns over China Evergrande Group's potential default strengthened the preference for safe assets, causing major countries' stock prices and interest rates to decline, while the U.S. dollar showed strength.

The Fed maintained its existing accommodative policy stance by keeping the policy rate at the current level (0.00?0.25%) and continuing asset purchases of $120 billion per month at the FOMC meeting. However, the policy statement noted that if economic progress continues as expected, it may soon be appropriate to slow the pace of asset purchases. Fed Chair Jerome Powell mentioned, "Tapering could be decided as early as the next meeting, and it may be appropriate to complete it around mid-next year."

In the dot plot, which shows Fed officials' expectations for policy rates, the number of participants expecting rate hikes in 2022 and 2023 increased, and the number of rate hikes was revised upward. Initially, the timing of U.S. rate hikes was expected in 2023, but the possibility of rate hikes starting as early as next year has increased.