No time to relaxThe U.S. Federal Reserve on Wednesday made a decision to freeze its benchmark lending rate. Federal Reserve Chair Janet Yellen expressed concerns about continuing risks to the U.S. economy arising from alarming fluctuations in the global economy and its financial markets. Yellen said the Fed’s pace in raising the federal funds rate will be incremental. She also changed the number of expected rate hikes for this year from four to two.
After the Fed’s announcement, financial markets at home and abroad were relieved because it alleviated the worry that the Fed may lift its benchmark rate from as early as March. After the Fed’s decision, major stock markets in Asia (except for Japan) saw upturns, while the U.S. dollar got weaker against other major currencies. Oil prices also rose by a small margin, which is also considered good these days. Markets think it’s a sign of an improvement in the global economy.
The Kospi neared the 1,990 level after dispelling earlier concerns about the possibility of it plunging to the 1,800 range. The Korean won regained its value to the level of 1,171 won against the dollar after nose-diving to 1,241 won per dollar.
As it turned out, foreign investors bought nearly 450 billion won ($390 million) worth of Korean shares after concerns that they might leave the Korean bourse en masse.
The freeze of the Fed’s rate can stimulate our financial markets in the short term. But over a longer period, it should have the opposite effect. After all, the Fed’s move only reaffirms a sense of wariness that the growth in the U.S. economy is coming to an end. The International Monetary Fund lowered its forecast for growth of the global economy to 3.4 percent from 3.6 percent this year, and to 3.6 percent from 3.8 percent next year.
Economic uncertainties in countries relying on selling petroleum and other commodities, the slowdown of the Chinese economy, and a double-digit decrease in global trade don’t show any signs of letting up.
On top of that, an increasing number of analysts have lower expectations for U.S. economic growth and inflation. Under these circumstances, the Fed must have thought it too risky to raise its current funds rate based on a few positive signs of recovery.
The rate freeze shows that even Uncle Sam is not immune from the global economic downturn. Korea’s government and corporate sector must not be put off guard by a temporary rebound in the stock market. They must prepare for the worst.
JoongAng Ilbo, March 18, Page 34