"No US Interest Rate Cut This Year... Possible Resumption of Tightening Cycle Next Year"

Adam Posen, Director of Peterson Institute for International Economics
Outlook at Seminar Hosted by Hankyung Business Association
"Prepare for Medium- to Long-Term Interest Rate Rise Trend"
"Greater Interest Rate and Fiscal Uncertainty if Trump Regains Presidency"

There is a forecast that the U.S. benchmark interest rate may not be cut this year or may be cut once and then raised next year.

On the 30th, Adam Posen, president of the Peterson Institute for International Economics in the U.S., made a keynote presentation on the theme of "Assessing the Global Business Environment and Korea's Business Response" at the "Turbulent Global Economy, Urgent Diagnosis" seminar held at the FKI Tower Conference Center in Yeouido, expressing this outlook.

Adam Posen, Director of the Peterson Institute for International Economics. Photo by Hyunmin Kim kimhyun81@

Posen said, "The U.S. neutral interest rate (the rate that can maintain potential growth without inflation or deflation) is rising and prices are not falling, so there will be no cut or only one cut in the U.S. benchmark interest rate this year, and the benchmark interest rate may be raised next year." In particular, he emphasized that "due to the expansion of defense, carbon, and industrial policy fiscal demands in the G7 and China, the decrease in Chinese capital inflows into Western countries, the reduction of risk aversion (leading to a decrease in U.S. Treasury demand), and productivity improvements (causing a rise in the neutral rate), the real yield on the U.S. 10-year Treasury bond will trend upward over the next several years," urging preparation for a mid- to long-term interest rate rise trend.

Regarding the direction of international policy following the U.S. presidential election, he analyzed, "There will be little policy difference in trade, foreign direct investment, and immigration between Biden's second term and Trump's second term," and "(regardless of who is elected) the first step will be protective measures on imports of Chinese electric vehicles and batteries, followed by measures on Chinese pharmaceuticals."

However, Posen predicted, "In Biden's second term, offshore export controls and sanctions will be much more aggressive and strict than in Trump's second term," and "while climate policy will show significant domestic differences, internationally the differences will not be as large as domestically."

He added, "Various tax reduction measures introduced during Biden's first term (such as corporate tax rate cuts) are scheduled to expire in January 2026, and at that time, interest rate and fiscal uncertainty will be greater if Trump is in power than if Biden is."

Regarding the recent "strong dollar" trend, he pointed out, "The U.S. monetary tightening cycle will resume in 2025, putting additional upward pressure on the dollar," and said, "The increase in U.S. inflation and fiscal deficit could trigger Plaza II in 2026." About Plaza II, the U.S. political daily 'Politico' also reported on the 15th that if former President Donald Trump returns to power, there is a possibility of re-pursuing the 1985 'Plaza Accord,' when the U.S. enforced the appreciation of the Japanese yen to resolve fiscal and trade deficits.

The seminar was hosted by the Korea Economic Organization Association (HanKyungHyup) to discuss changes in the global business environment and Korea's response measures. Kim Chang-beom, full-time vice chairman of HanKyungHyup, said, "Recently, our economy is showing signs of recovery due to the base effect from last year's ultra-low growth and increased semiconductor exports, but if high oil prices, high inflation, and high interest rates persist, it is difficult to rule out a significant delay in economic recovery due to sluggish domestic demand and deteriorating corporate profitability," emphasizing, "We must prepare contingency plans in advance to block the domestic transmission of global risks and open the way for corporate investment and job creation through efforts to revitalize management."