The new normal begins
The U.S. Federal Reserve has raised the federal funds rate by a quarter percentage point, the first such increase in nearly a decade. Global financial markets showed a mixed reaction to the Fed’s departure from a seven-year zero interest rate. After the Fed’s move, the Dow Jones Industrial Index and major Asian stock indexes surged. The Kospi and Kosdaq indices also rose, and the Korean won didn’t show any meaningful fluctuation. Fed Chair Janet Yellen reassured market watchers by stating that the central bank will maintain its benchmark lending rate lower than market averages.
Yet, it’s too early to feel at ease. Uncertainty still prevails in the market, which may lead to financial crises in emerging economies or a devaluation of the Chinese yuan. Uncle Sam’s adherence to a zero rate over the last seven years helped release an astronomical amount of greenbacks - $12 trillion - which made their way to emerging economies. If that money is rapidly pulled back, it could trigger financial crises in Brazil, Russia, Turkey and South Africa. Financial crises in emerging economies eventually affect the Korean economy, as they hurt our exports and can pull our economy into a vortex of financial outflows.
The government must study the financial movements of China, the European Union and Japan in the wake of U.S. monetary tightening. Beijing decided to fix the yuan’s exchange rate irrespective of the U.S. dollar. As a result, the yuan on Wednesday fell by the largest margin in 54 months to 6.4624 yuan per dollar. Analysts expect the yuan’s value to plummet to 7 yuan per dollar next year. That signals a global currency war on the horizon. For a small and open economy like Korea, the government must carefully figure out the implications of such trends to effectively cope with the repercussions.
The Fed’s rate hike is not likely to hurt our economy much. It could help boost our stock market over the long haul. Korea has been registering an annual $100 billion surplus in trade, not to mention its sizable foreign exchange reserves amounting to $360 billion.
Yellen’s insistence on a slow pace for rate hikes also gives us relief. The government must wrap up its restructuring by cleaning up zombie enterprises. If politicians turn away from economic challenges because they’re fixated on April’s general elections, our economy could face a real crisis.
JoongAng Ilbo, Dec. 18, Page 34