Fed tightens after three years as high rates, inflation loom

The U.S. Federal Reserve has returned to monetary tightening after more than three years. On Wednesday, the Fed raised its benchmark rate by 0.25 percentage point to 3.75 to 4 percent, its first increase since July 2023. The 12-member Federal Open Market Committee voted unanimously. Fed Chair Kevin Warsh said inflation was “too high, and has been for too long.” Despite President Donald Trump’s pressure to cut rates below 1 percent ahead of the midterm elections, the Fed made clear its commitment to price stability and left open the possibility of another increase this year.

The immediate trigger for the shift was the surge in international oil prices above $100 a barrel as the Middle East crisis dragged on. Rising oil prices have intensified inflation, while concerns over the massive U.S. fiscal deficit and mounting interest costs pushed the 10-year Treasury yield above 5 percent, its highest level since 2007.

In Japan, the 10-year government bond yield has surged above 3 percent for the first time in 30 years, and the Bank of Japan is expected to raise rates again Friday. The world now stands on the threshold of broad monetary tightening. Higher rates will increase borrowing costs for corporate loans, bonds and mortgages, squeezing businesses and households.

Korea also faces mounting pressure from high interest rates and inflation. The 10-year government bond yield has topped 4.5 percent, while consumer inflation has remained above 3 percent for two consecutive months amid higher oil prices. Households that borrowed heavily to buy homes and invest in stocks during the low-rate era now face sharply higher interest costs.

Yet the government plans a record expansionary budget of 821 trillion won next year, increasing spending by 12.8 percent from this year on expectations of a semiconductor boom. Excessive populist spending will ultimately fuel inflation and weaken the economy’s fundamentals.

The Fed’s return to tightening is a warning to break from the habits of the low-interest-rate era. The Bank of Korea (BOK) is also expected to raise its benchmark rate once more this year. As high rates and inflation intensify, households, businesses and the government must manage debt and prepare for shocks.

In particular, the National Assembly must closely scrutinize the budget to ensure fiscal policy does not work against the BOK’s efforts to stabilize prices. Fiscal expansion at a time of persistent inflation could undermine monetary tightening. Without price stability, there can be no stability in people’s livelihoods.