Fed’s cautious rate of return

After a two-day meeting with the whole world watching closely, the U.S. Federal Reserve on Thursday decided not to lift the benchmark interest rate above the near zero percent amid jitters in China and other emerging markets. The U.S. Fed previously hinted it would end its near-decade-old expansionary policy and normalize short-term interest rates within the year, but stock market volatility and concerning signs of a fast-landing by the Chinese economy have stoked voices calling for a delay in the Fed’s tightening cycle. The decision will likely moderate the pace of foreign capital from emerging economies, including Korea.

The Fed’s decision to stay put on rates, however, only heightened concern China and the global economy may be doing worse than expected. “The situation abroad bears close watching,” Fed chair Janet Yellen said, suggesting overseas factors have played a large part in the interruption in the Fed’s rate policy. The Fed maintained confidence in the U.S. economy, raising expectations for this year’s economic growth to 2.1 percent from 1.9 percent, following solid 3.7 percent growth in the second quarter. It lowered its projection for the unemployment rate to 5 percent. Unemployment is already at 5.1 percent.

“Heightened concerns about growth in China and other emerging market economies have led to notable volatility in financial markets,” Yellen said.

The indecision also added to market uncertainties and doubts about global economic prospects. The Fed’s rate hike in September has been forewarned and factored in global markets. Markets of emerging economies have already been rattled by an exodus of foreign capital. Yellen said “Every meeting is a live meeting” and that October “remains a possibility.” The markets would inevitably go through a rocky ride as they guess if the Fed will raise interest rates in subsequent meetings in October and December. Because of the unusually unclear message from the Fed, some investors and experts are betting the U.S. won’t move to raise interest rates this year.

Fortunately, the local market has developed a stronger stomach against overseas upsets. Standard & Poor recently increased the sovereign credit rating of Korea by one level while downgrading Japan’s. The market won’t likely be greatly affected by the shift in U.S. monetary policy. The bigger threat to the economy is China’s slowdown. Regardless of overseas uncertainties, Korea must push ahead with reforms to strengthen its fundamentals and future potential. It also needs to tend to its weaknesses such as snowballing household debt so it does not jeopardize the economy when the U.S. raises rates.

JoongAng Ilbo, Sept. 19, Page 26.