Trust and economy go hand in handIn a press conference Wednesday, Federal Reserve Chairwoman Janet Yellen said, “We can’t promise there will not be volatility when we make a decision to raise rates.” The Fed acknowledged the global impact on the market of an increase in interest rates.
If the United States raises rates, financial markets around the world are bound to suffer. But it became clear that other countries’ circumstances are not the priority of the U.S. Federal Reserve. Each country has to fasten its seat belt to prepare for market fluctuation.
The Fed adjusted this year’s growth outlook to 1.8 to 2 percent from the 2.6 to 3 percent forecast in December. A severe winter and strong dollar were unexpected variables. But even taking them into account, recovery has been slower than anticipated.
While the International Monetary Fund and World Bank pressured to delay a rate increase, the Fed has not budged as if rejecting any “interference in domestic affairs.”
Meanwhile, the Bank of Korea lowered its key interest rate to historic lows. A revised supplementary budget was about to be drawn up to boost economic psychology hurt by the MERS outbreak and revive economic vitality. Of course, Korea’s economic management system is not comparable to that of the United States. However, we need to look at the situation straight. What swallowed economic sentiment was the collective fear amid the MERS crisis. The government failed in its initial response, taking incompetent and inappropriate measures. Then people grew distrustful of the government and the sentiment spread. Can economic measures revive sentiment damaged by fear and distrust? Why can’t the government offer more drastic measures to regain lost trust? Only when people trust government policies can stimuli work.
Interest rate policy and fiscal policy are not free. The cost of lowering the interest rate would be more household debt. The price of a supplementary budget is a larger fiscal deficit.
The global financial crisis originated in the United States in 2008. Seven years have passed, and the United States has gone through intense restructuring. Americans sold houses and tightened spending. The government and companies cut unnecessary expenses. During the same period, the individual and sovereign debt of Korea increased.
MERS paralyzed the normal function of hospitals, schools and public offices, and lives of people became harder. Neighborhood shops lost customers, and young people lost their temp jobs. Not much would change with an interest rate increase. More and more people would struggle to pay interest payments.
MERS will go away in the end. But we must remember that we didn’t have sufficient manuals and the existing manuals were not followed. I am concerned the interest rate policy and fiscal policy would be the same.
The author is a New York correspondent of the JoongAng Ilbo.
JoongAng Ilbo, June 20, Page 26
by LEE SANG-RYEOL