"Uncertainty Over Next Year’s Policy Grows Despite Fed Rate Cut"

The United States Federal Reserve (Fed) resumed interest rate cuts this month, but analysts say uncertainty surrounding next year’s monetary policy is actually increasing. Expectations for additional rate cuts by the Bank of Korea have also receded, leading to forecasts of heightened volatility in the domestic market.

Cho Yonggu, a researcher at Shin Young Securities, stated on the 23rd, “Long-term interest rates in advanced economies continue to show instability due to increased government bond issuance in European countries such as Germany and the United Kingdom, as well as the downgrade of France’s credit rating.”

He explained, “The September statement described a shift in the risk balance of the Fed’s dual mandate and emphasized downside risks to employment. By removing language about considering the size and timing of further policy rate adjustments, the Fed suggested that the current easing stance will continue for the time being.”

He offered a conservative outlook on the Fed’s future rate policy. Cho predicted, “Including September, Fed Chair Jerome Powell is likely to implement three insurance cuts of about 75 basis points (1bp=0.01 percentage point) during his term. After that, a new chair more favorable to rate cuts is expected to take office next year, making it likely that an additional 2 to 3 cuts (50-75 basis points) will occur.”

Regarding the Fed’s decision last week to cut the benchmark rate by 0.5 percentage points to a range of 4.75-5.00%, he commented, “The median value on the dot plot did not show a larger downward adjustment than the financial markets had expected.”

He took a more cautious view on domestic monetary policy. Cho noted, “The Bank of Korea Governor indicated during the Camdessus Lecture that the policy rate will be maintained slightly above the neutral rate. He also mentioned that Korea must consider a neutral rate that takes financial stability into account, and if the effective lower bound is approached, loan support programs could be an alternative to unconventional monetary policy.”

He added, “Accordingly, the risk has increased that the Bank of Korea will limit additional rate cuts to just one more (25 basis points). After a 25 basis point cut in the fourth quarter, uncertainty over further cuts next year is rising, and the timing of any cut could be delayed to November.”

Cho also pointed out, “The recent renewed weakness of the Korean won and the continued overheating of the real estate market in Seoul are additional concerns.” He continued, “On the economic front, whether export growth slows due to delays in follow-up tariff negotiations will be a key variable.” He added, “The exchange rate has rebounded to the 1,400 won level, and concerns are being reflected regarding $350 billion in direct investment and other factors, amid continued delays in follow-up tariff negotiations with the United States.”