Fed’s rate hike puts pressure on the BOK to tighten further

The Bank of Korea (BOK) faces mounting pressure to consider further rate increases after the U.S. Federal Reserve raised interest rates Wednesday for the first time since July 2023, signaling that it could continue tightening monetary policy to curb inflation.

The Fed unanimously raised its benchmark interest rate by 25 basis points to a target range of 3.75—4 percent,  despite U.S. President Donald Trump's repeated calls for the central bank to lower borrowing costs to boost the economy.

The rate increase widened the gap between Korea’s and the United States’ benchmark interest rates to as much as 1 percentage point, after the BOK raised its policy rate by 25 basis points in both July and August to 3 percent. At its August meeting, the BOK signaled that further rate hikes remained possible, while saying it would assess domestic and external conditions to determine their timing and pace.

The wider rate differential adds to the pressure on the BOK as it weighs rising inflation, a weakening won and elevated household debt. The gap has already weighed on the currency, with the won weakening to 1,382.2 against the dollar at 3:30 p.m. Wednesday, from 1,368.6 the previous day.

"With the Fed raising interest rates for the first time in more than three years since July 2023, its policy stance is expected to remain hawkish, given Chair Warsh’s emphasis on price stability and signals for further rate increases," said Kwon Min-soo, senior deputy governor at the BOK.

"With external risk factors still in play, including developments in the war in the Middle East, global oil prices, concerns over fiscal sustainability in major economies and uncertainties surrounding the AI industry, and with monetary policy decisions by major central banks such as those in Japan and Britain also due, we will closely monitor conditions in domestic financial and foreign exchange markets with heightened vigilance," Kwon added.

According to the Federal Open Market Committee (FOMC) members' new median economic projection, the federal funds rate is expected to rise to 4.1 percent at the end of this year, up from the June projection of 3.8 percent, suggesting another increase later this year.

Fed Chair Kevin Warsh did not submit a "dot plot" projection as he had pledged not to.

In the run-up to the FOMC meeting, new data added to concerns over price pressures. On Friday, the U.S. Department of Labor's Bureau of Labor Statistics reported that the "core" consumer price index, which excludes volatile food and energy costs, gained 0.3 percent last month, 0.1 percentage point higher than forecast.

During a press conference, Warsh noted that inflation is "too high" and has remained "for too long," while reiterating the central bank's commitment to achieving price stability.

"The labor side of the Fed's congressional remit is in good shape. Yet for more than five years, inflation has been running above target," he said, referring to the Fed's inflation target of 2 percent.

“So our predominant focus is on the price stability side of our mandate. The plain fact is that inflation is too high and has been for too long,” he added.

The Fed chair underscored that the unanimous vote on this week's rate decision shows the central bank's "resolve to achieve price stability on a timelier basis."

This week's hike marked a setback for Trump, who has pressured the Fed to lower interest rates ahead of the November midterm elections.

In a recent social media post before the rate-setting meeting, Trump threatened to stop trading with countries with which the United States has a trade deficit unless the Fed lowers interest rates.

Asked about Trump's threat and his discussions with the president, the Fed chair said, "I don't have anything for you."

Following the rate increase, Trump doubled down on his call for lower rates in a social media post.

"Interest Rates in the United States should be 1%, or less, because we are the Best Credit in the World — BY FAR. Our Country is BOOMING with new Investment!" he wrote on Truth Social.

He also claimed that if the United States stopped trading with every country with which it ran a trade deficit, it would make at least $1.5 trillion a year.

"The word 'Deficit' is nothing more than a fancy word for LOSS. We are 'carrying' almost every country in the World, and that cannot go on any longer," he said. "LOWER THE INTEREST RATES FOR THE UNITED STATES OF AMERICA, AND FAST!"

U.S. GDP is expected to grow by 2.3 percent this year, up from 2.2 percent projected in June, and by 2.4 percent next year, up from the previous forecast of 2.3 percent, according to the Fed median projection.

Personal Consumption Expenditures (PCE) inflation is projected to reach 3.7 percent at the end of the year, an increase from the June projection of 3.6 percent, and 2.3 percent at the end of next year, the same as the previous forecast.

PCE is a measure of household consumer spending on goods and services in the United States.

BY JIN MIN-JI, YONHAP [[email protected]]