Fed slashes rates by a half point, first cut in 4.5 years

The Federal Reserve, the central bank of the United States, made a significant move by cutting its benchmark interest rate by half a percentage point on Wednesday (local time), exceeding expectations of a 0.25% reduction. The decision aims to alleviate fears of a potential recession. This marks the Fed’s first change in monetary policy in four and a half years, raising the likelihood that the Bank of Korea (BOK) may also lower its interest rates in the near future.

"The Federal Reserve decided to lower the target range for the federal funds rate by 1/2 percentage point to 4-3/4 to 5 percent," the Fed announced following its Federal Open Market Committee (FOMC) meeting. This was the Fed's first rate cut since it began raising rates from 0.25%, which had remained since March 2020, to 0.5% in March 2022, ultimately reaching 5.5% in July 2023, which remained for 14 months.

In its latest Summary of Economic Projections (SEP), the Fed's dot plot—a chart of policymakers' interest rate forecasts—projected the median federal funds rate of 4.4% by the end of this year, signaling another 0.5% cut is likely in the remaining FOMC meetings in November and December.

Following the Fed's significant rate cut, the market now anticipates that the BOK will lower its rates before the year ends. Many nations have already reduced rates to counter recession concerns, and with the Fed's recent move, expectations are growing that the BOK will join the global trend. The interest rate gap between the U.S. and South Korea has shrunk from 2.0 percentage points to 1.5 percentage points since July 2022, when the gap first shifted. This narrowing has eased worries about capital outflow, giving the BOK more flexibility to reduce rates.


이동훈기자 dhlee@donga.com