[News Terms] 'Interest Rate Pivot' Signaling a Change in Monetary Policy

As the United States maintains its policy interest rate (benchmark rate) at the current level (5.25?5.50%), the Bank of Korea is also likely to keep its benchmark rate unchanged for the time being. Experts generally expect the Bank of Korea's rate-holding stance to continue until early next year, with rate cuts occurring only after the second quarter alongside the U.S. 'pivot' in monetary policy.

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The term 'pivot' literally means 'to turn' or 'to find a center.' It is used in various contexts to describe a point of reference or a sudden change in direction. In sports, it refers to changing direction by using one foot as an axis. In basketball, players must pivot to avoid a traveling violation. In baseball, it describes the technique where a fielder who has caught a runner at second base throws to first base to complete a double play.

This term is also used in international strategy. During President Barack Obama's administration, the shift of U.S. diplomatic and military focus to the Asia-Pacific region was called the 'Pivot to Asia.' Recently, Kurt Campbell, the White House National Security Council (NSC) Coordinator for Indo-Pacific Affairs and President Joe Biden’s pick for the next U.S. Deputy Secretary of State, was involved in designing the Pivot to Asia strategy and published a book titled 'Pivot' in 2016.

In finance, a pivot refers to a change in the direction of financial policy. Specifically, when there is a change in monetary policy such as interest rates, it is called an 'interest rate pivot.' Jerome Powell, who became Chair of the U.S. Federal Reserve (Fed) in February 2018, raised the benchmark interest rate by 1 percentage point over a year while pursuing a tightening policy, then abruptly shifted to rate cuts. At that time, the benchmark rate, which was 2.25?2.50%, was lowered to near zero (0?0.25%) within three quarters due to the spread of COVID-19. This led to the term 'Powell pivot' (Powell’s change of stance).

In a speech at the New York Economic Club on the 19th of last month, Chair Powell stated that "inflation is on a downward trend but still high," raising the possibility of an interest rate pivot. On the 1st of this month (local time), the Fed held the benchmark rate steady for the second consecutive time, maintaining it at 5.25?5.50%. Powell said, "We are not considering rate cuts at the moment," but acknowledged that "rising Treasury yields are exerting a tightening effect on financial markets." Major economic foreign media evaluated this as the Fed signaling a pause in rate hikes, and Bloomberg reported that "the market cheered Powell’s dovish pivot."