US Federal Reserve Likely to Raise Interest Rates, Impact on Korean Monetary Policy

The prospect that the US Federal Reserve (Fed) will increase interest rates further rather than lower interest rates is gradually gaining strength. This is expected to have a strong impact on Korean monetary policy.

23rd (local time) English daily <파이낸셜타임스>(FT) reported, “Traders are increasing bets that the Federal Reserve will raise interest rates again,” adding, “After stronger-than-expected US economic data and hawkish comments from policymakers, the hope forces a change in market expectations.” .

As a basis for this, he noted the fact that the current options market “predicts the possibility that US interest rates will rise within the next 12 months by around 20%.” This is more than double the forecast of less than 10% at the start of the year.

A representative example is the prospects of Columbia Threadneedle Investments. Ed Al-Husseini, an interest rate strategist at CTI, analyzed that the current option price reflects the possibility of a 20% increase in the interest rate within the year.

Asset management company PGIM (Prudential Investment Management) predicted the probability of an interest rate increase of 29% as a result of analyzing options data from Barclays.

Ben Durham, head of global policy and asset allocation at Piper Sandler, put the likelihood of a federal interest rate hike in the next 12 months at nearly 25%. only him “There is a lot of uncertainty,” he said, adding, “In some scenarios, we may see cases where the Federal Reserve cuts interest rates at a much faster rate than expected.”

Last year, expectations that the Federal Reserve would cut interest rates in the first half of this year dominated the financial market. Complaints that the long-term high interest rate policy was hindering investment in the financial market were widespread in the global investment market, including Wall Street, and this led to expectations of an interest rate cut.

However, the ‘single economic boom’ of the United States, which exceeds expectations, hinders such expectations. Thanks to the spread of artificial intelligence (AI) technology, labor productivity in the non-agricultural sector in the United States in the fourth quarter of last year increased by 3.2% (annual rate) compared to the same quarter of the previous year. It has been on the rise for three consecutive quarters.

In addition, the labor market maintains an unprecedented full employment system. Last month, the unemployment rate in the United States was 3.8%, staying below 4% for two years.

Above all, consumption, the core of the US economy, is robust. Retail sales in the US last month increased by 0.7% compared to the previous month, more than double the market expectation (0.3%).

The Biden administration promotes technological security and attracts global companies from Korea and other countries to invest in the country through legal enforcement and strong financial incentives As large-scale investments continue, the three factors of employment, consumption and production all fit together. in.

In the World Economic Outlook released on the 16th, the International Monetary Fund (IMF) significantly raised its forecast for the US economic growth rate this year from 2.1% to 2.7%.

Because of this boom, prices in the United States barely fall. The rate of increase in the US consumer price index (CPI) for March, published on the 10th (local time), recorded 3.5% compared to the same month last year, exceeding market expectations and exceeding at the previous month’s rate of increase (3.2%). This is the highest level in six months since September last year (3.7%).

The core inflation rate, which is a reference indicator for the Fed’s interest rate policy, was 3.8%, which was higher than the rate of consumer price inflation.

The growth rate of core personal consumption expenditure (PCE) in March, which is scheduled to be published on the 26th (local time), is also expected to reach 2.7%.

The increase in wages due to the economic boom has not been able to keep up with the increase in prices, which is why the middle and lower class in the United States continues to face a difficult situation despite the boom.

Accordingly, a stronger interest rate policy is inevitable in order to stop the upward economic trend and reduce the inflation rate to the Federal Reserve’s 2% target level. This is against the background that the market is increasingly anticipating the possibility of an interest rate rise in the United States.

In fact, the level of comments coming from US policy makers is getting stronger. On the 16th (local time), Federal Reserve Chairman Jerome Powell said at the Washington Forum on US-Canada Economic Relations held in Washington, DC, “Inflation rates continue to fall, but not quickly enough,” adding, “Recent data shows that we are on track to reach our 2 per cent inflation target.” “There is a possibility that it will take longer than expected to achieve this goal.”

Richard Clarida, Pimco economic adviser and former vice chairman of the Federal Reserve, said: “If the indicators continue to disappoint, the Federal Reserve will have to intervene again to raise interest rates,” he said, noting that although an interest rate hike is not the default scenario, an increase is possible if the core inflation rate above 3%. again.

Previously, on the 10th (local time), former US Treasury Secretary Lawrence Summers said in an interview with Bloomberg TV, “Based on the current facts alone, the June interest rate cut is a dangerous and serious mistake that compared to the error made by the Federal Reserve in the summer of 2021.” “We have to take seriously the possibility that the next interest rate move will be up rather than down,” he said.

New York Fed President John Williams also said on the 18th (local time), “We don’t see an urgent need to cut interest rates,” adding, “If the data suggests that higher interest rates are necessary to achieve our goal (2%. annual inflation rate), we will definitely do that.” “You would want to,” he said.

If the Federal Reserve really makes such a move, it would be a huge burden for the Bank of Korea. If the interest rate gap between Korea and the United States widens further than now, we have no choice but to pay more attention to the movement of the dollar/earn exchange rate, which is currently on the rise. The possibility that the Fed’s interest rate hike, together with the unstable international situation, will trigger serial interest rate hikes by central banks in major countries around the world cannot be ruled out.

▲ Consumers buy products at a supermarket in Foster City, California, on the 10th (local time). ⓒShinhwa = Yonhap News

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