[FOMC] US 4 Consecutive Giant Steps... "Final Interest Rate Will Rise Further"

De Facto US Interest Rate 5% Era Forecast
US-Korea Interest Rate Gap Expands Up to 1.0%P

[Asia Economy New York=Special Correspondents Seolgina Jo and Sojung Seo] The U.S. central bank, the Federal Reserve (Fed), has implemented a so-called 'Giant Step' by raising the benchmark interest rate by 0.75 percentage points four consecutive times. As the upper limit of U.S. interest rates jumped to 4.0%, the highest level since 2008, the interest rate gap with South Korea widened to a maximum of 1.0 percentage point. Fed Chair Jerome Powell also indicated that the final U.S. interest rate will rise further. In South Korea, which is currently experiencing liquidity tightening in the financial market, concerns are intensifying.

On the 2nd (local time), the Fed announced after the Federal Open Market Committee (FOMC) regular meeting that it would raise the federal funds rate by 0.75 percentage points from the previous 3.0-3.25% to 3.75-4.0%. Despite the high-intensity tightening, inflation has been stubbornly persistent, leading to a unanimous decision to implement an unprecedented four consecutive Giant Steps.

The Giant Step was a step long anticipated by the market. The consumer price index (CPI) released last month showed an 8.2% increase year-on-year for September, raising concerns about entrenched inflation, and recent employment data supported a strong labor market.

At a press conference that day, Chair Powell reaffirmed the tightening stance, saying, "It is very premature to think or talk about stopping rate hikes," and "We still have a way to go." He also effectively forecasted an era of a 5% benchmark interest rate by stating, "The final rate level will be higher than previously expected (as indicated in the September dot plot)."

However, he also hinted that the pace of rate hikes might slow as early as December. In other words, the message is to extend the tightening period longer while raising the final rate to a higher level by slowing the speed (size of hikes).

With the Fed's rate hike decision that day, the interest rate inversion gap between South Korea (3.0%) and the U.S. widened further to 0.75-1.0 percentage points. This is the same level as the most recent rate inversion period from March 2018 to February 2020.

If this Korea-U.S. interest rate inversion prolongs, outflows of foreign investment funds and won depreciation are inevitable. Moreover, won depreciation is also considered a factor that fuels inflation. Accordingly, the Bank of Korea is also expected to raise its benchmark interest rate on the 24th. This would mark the sixth consecutive increase. On the 3rd, Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho, Bank of Korea Governor Lee Chang-yong, Financial Services Commission Chairman Kim Ju-hyun, and Financial Supervisory Service Governor Lee Bok-hyun held an emergency macroeconomic and financial meeting to discuss the impact of the Fed's rate hike decision on the market.

The New York stock market fluctuated. The market started lower due to tightening concerns but rose immediately after the release of the monetary policy statement on expectations of policy adjustment. However, it plunged following Chair Powell's hawkish remarks. The Nasdaq index, which is sensitive to interest rates and centered on technology stocks, fell 3.36% compared to the previous session. On the 3rd, investment sentiment also weakened in the Korean stock market, with the KOSPI falling below 2300 at one point during the session. The won-dollar exchange rate also rose by more than 10 won compared to the previous day's closing price in early trading, reaching the 1420 won level.