The party’s over

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The party’s over

The U.S. Federal Reserve has decided to wrap up the quantitative easing (QE) the Obama administration adopted as an extraordinary measure to rejuvenate its battered economy after the 2008 global financial meltdown. QE is a nonconventional monetary policy aimed at indirectly injecting currency to the market through a central bank’s purchase of financial assets from commercial banks and other private institutions. Putting an end to the program means the Fed has no intention to release any more funds on the market. After enjoying a gleeful party of overflowing liquidity over the last six years, the world economy now has to confront the mixed blessings of the end of an almost unrestricted money supply.

The Fed’s decision to end QE is a double-edged sword for the Korean economy. The U.S. government had repeatedly warned that it would discontinue QE when the U.S. economy showed signs of a rebound along with a recovered employment rate. Therefore, the Fed’s announcement reflects palpable improvement in the U.S. economy, which could provide Korea’s exporters with some golden opportunities, including a chance to recover from sluggish demand over the past few years.

However, if the Fed’s decision triggers a cut in liquidity and increased interest rates around the globe, Korea will be under pressure to raise its interest rates, not to mention worrying about foreign capital outflows. That will most likely dash cold water on a recovery of our domestic consumption and help exacerbate the snowballing of Korea’s household debts.

If Washington takes steps to raise interest rates in the near future, our economy may have to suffer greater damage than other countries. The International Monetary Fund warned that if the U.S. government raises rates, it will have a big impact on Korea and its economic growth rate could fall by 0.98 percent in a worst-case scenario.

The Federal Reserve said it will maintain its current super-low rates for a while - without specifying a date for interest rate hikes. We must keep a close watch on the fluctuations of global financial markets.

In contrast with signs of an economic rebound in America, the economies of Europe and Japan continue to sag. There are even concerns about possible deflation in various regions. As each country’s monetary policy is challenged, uncertainty in the world economy grows. It is time for all economic players in Korea to be alert to a range of potential dangers. Forewarned is forearmed.

JoongAng Ilbo, Oct. 31, Page 34

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