Fed Puts Brakes on U.S. Interest Rate

The U.S. Federal Reserve Board (FRB) halted a belt-tightening policy that lasted for the past two years and froze the federal funds rate on August 8 (local time).

The FRB held a Federal Open Market Committee (FOMC) meeting on August 8 and decided to keep its target for the federal funds rate at 5.25 percent. So the gap between Korean interest rates and that of the U.S. will remain in the current one percentage point range.

The Board’s decision halted the continuing increase in the U.S. interest rates, which have risen 0.25 percent 17 times since June 2004.

As the cause of the latest decision, the FRB cited the cooling of the housing market and skyrocketing oil prices, which in turn slow the country’s economy.

In the announcement, the FOMC said, “Various economic indicators show that economic growth has moderated from its quite strong pace earlier this year, partly reflecting a gradual cooling of the housing market and the lagged effects of increases in interest rates and energy prices.”

“Some inflation risks remain. The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth” said the committee, opening a possibility of additional interest rates hikes.

Some analysts expect interest rates will not increase any time soon while others see there will be further increase of one or two times in September and October. As the FOMC said, the uncertainty on the U.S. economy is more and more visible with the economy showing signs of slowdown and inflation.

kong@donga.com