Federal Reserve freezes base rate 15 months later

The U.S. Federal Reserve (Fed) decided to keep its benchmark interest rate unchanged on Wednesday (local time) after a 15-month pause. However, it hinted at two additional rate hikes in the future, further widening the interest rate gap between South Korea and the United States and deepening concerns for the Bank of Korea (BOK).

During the Federal Open Market Committee (FOMC) meeting on that day, the Fed announced its decision to maintain the current interest rate at 5.00-5.25%. This marks a rare pause in the series of 10 rate increases totaling 5.0 percentage points, which began in March last year. Fed Chairman Jerome Powell (pictured) emphasized that this decision was not an end to tightening but rather a pace adjustment, stressing that "almost all FOMC members believe that further rate hikes are appropriate."

According to a summary of FOMC members' future rate expectations, the median estimate for the final interest rate within this year is 5.6% (ranging from 5.5% to 5.75%). This suggests a possibility of a 0.5 percentage point increase. In this case, the interest rate gap between South Korea and the United States could widen further, from the current 1.75 percentage points to 2.25 percentage points. Global stock markets showed mixed reactions to the Fed's message of potential rate hikes following the decision to keep rates unchanged. On Thursday, the KOSPI index closed at 2,608.54, down 0.40% from the previous trading day, and the USD-KRW exchange rate ended the day at 1280.5 won, up 2.0 won. While the Dow Jones index experienced a slight decline in the U.S. stock market, the Nasdaq index rose by 0.39%, continuing its rally driven by artificial intelligence (AI) stocks.


Hyoun-Soo Kim kimhs@donga.com