Smart timing neededThe U.S. Federal Reserve cut the benchmark interest rate by 0.75 percent Tuesday in an attempt to calm turmoil in stock markets around the world.
After the move, the New York stock market went down by a far lesser margin than feared and Asian and European markets rebounded.
The Fed’s interest cut averted a fund run, the worst-case scenario in which shareholders might sell off their stocks and redeem stock funds.
The Fed was determined not to neglect the problem in financial markets and its solution has made an impact.
However, the fact that the Fed made the biggest interest rate cut in 24 years, one week earlier than it planned, means that the global economy is in deep trouble.
Last year in America, the consumer price index went up by 4.1 percent but the Fed lowered the interest rate despite fear of inflation. The decision was made to prevent insecurity in the financial market from spreading to the real economy.
The Fed concluded that a recession due to anxiety in the financial market was more serious than a recession caused by inflation in product prices.
However, a rate cut is not always the solution. Some say a reduction in the interest rate is not a cure but a pain-killer.
But we need to prevent a patient from dying from shock before he goes through an operation.
After the Fed’s rate cut, central banks in major countries are prepared to lower their interest rates as well. They think that the impact from the U.S. subprime mortgage financial crisis will be larger and last longer than expected.
We believe that the Bank of Korea also needs to examine an interest rate cut. Korea’s economy and financial market are also linked to the global markets.
The Korean central bank recently changed its perspective on the U.S. subprime mortgage crisis from “optimistic” to “worrisome.” When advanced countries lower the interest rate as a preemptive move despite a fear of inflation, this sends a message to us, too.
The Bank of Korea will have to choose between stabilizing consumer prices and tumult in the global financial markets and a recession.
In the past, the central bank came up with a remedy long after real estate prices surged.
The bank must not repeat the same mistake. Timing is very important when adjusting an interest rate.