Bracing for the storm

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Bracing for the storm

Janet Yellen, chair of the Federal Reserve, made it clear she would raise the benchmark lending rate this year. The move was anticipated after her declaration of an end to quantitative easing last October, but most market watchers on Wall Street weren’t sure of the timing after uncertainty over the recovery of the U.S. economy deepened. The latest announcement by Yellen dismisses wishful thinking.

The Fed is expected to lift the rate in September or December. Fortunately, Yellen said she would not tighten the money supply quickly as “it will be several years” before the Fed’s benchmark rate is back to normal - which is close to 4 percent in an economy that’s performing well. Her remarks will help the global financial market take a breather for a while.

The Fed’s rate increase will trigger worries about capital outflows from emerging economies across the globe. The Fed’s decision in October to end its quantitative easing programs and a rumored rate hike led to a terrifying moment for emerging economies like Brazil and Mexico after a precipitous plunge of their currencies.

Our economy must be well prepared for the repercussions. Despite relatively healthy economic fundamentals - a solid fiscal condition, the world’s seventh-largest foreign reserves and a current account surplus amounting to $100 billion - the government must not be blindly optimistic. Our economy has been stuck in a trap of low growth coupled with chronically stagnant domestic demand and the rapid aging of its population, not to mention a ticking time bomb of 110 trillion won ($100.9 billion) in household debt. Chaos in global financial markets could affect the weakest part of our economy.

The government and Bank of Korea must figure out what combination of policies can effectively help us through the storm. Given faint signs of economic recovery, the authorities must avoid any mismatch of measures in interest rates, exchange rates and foreign reserves. Fixing exchange rates, in particular, is tough in a situation in which an abnormal surplus in the current account - despite decreasing exports - continues to lift the won’s value.

Fixing interest rates is tricky, too. If Bank of Korea Gov. Lee Ju-yeol opts to further lower them to revitalize our economy, his timing will be most important. It will be practically difficult to do so after the Maginot Line of September.

The government must closely monitor fluctuations in financial and foreign exchange markets. Uncertainties will grow further in the Kosdaq market, thanks to the measure in June to ease the cap on the upper and lower trading limits. If our stock market’s rebound dies, it could wreak havoc on debt-ridden households. For their part, those households must reduce their debt burden and refrain from risky investments in order to brace for future shocks.

JoongAng Ilbo, May 26, Page 30

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