Bracing for a hike

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Bracing for a hike

The Federal Reserve is likely to raise its benchmark lending rate within this year. William Dudley, president of the Federal Reserve Bank of New York and vice-chairman of the Federal Open Market Committee, hinted at a possibility of notching up the Federal funds rate as early as September.

“The market is complacent about the need for gradually snugging up short-term interest rates over the next year or so,” he said on Tuesday. Dennis Lockhart, chief executive officer of the Federal Reserve Bank of Atlanta, also mentioned a probability of lifting the benchmark rate more than once this year.

Their remarks are bad news for global financial markets, which have been negative about the possibility of such a hike within this year. At the news, most stock markets, including Korea’s, crashed. The U.S. dollar gained, while the Korean won plunged.

It could be too early to accept a Fed rate hike in September as a fait accompli. Above all, joblessness and inflation rates in the United States — domestic factors that affect the Fed’s decision — do not show a clear direction yet. Also, Dudley, a deputy of Fed Chair Janet Yellen, and Lockhart are both hardliners who have persistently championed the need for a rate hike.

Nevertheless, we must get ready for such an upswing because the Fed is more likely to raise the rate solely based on domestic factors now that China has achieved the level of growth the market expected and repercussions from the Brexit vote have begun to subside.

Fortunately, Korea has relatively robust economic conditions as seen in its foreign reserves exceeding $300 billion and the biggest-ever current account surplus. Standard and Poor’s decision to upgrade Korea’s credit rating from AA- to AA is also a boon for our economy because such a vote of confidence by the international credit rating agency acknowledges our economic resilience at times of external crisis. But we live in an era in which totally unexpected things take place.

The only way to tackle those challenges is strengthening our economic fundamentals. We must reinvigorate our lackluster domestic demand and reform our export-driven economy, which is vulnerable to outside shocks. The government must revitalize our services sector, concentrate on finding new growth engines and raise productivity.

If we don’t prepare for the worst when we can afford it, the Miracle on the Han could turn into a has-been in the dustbin of history.

JoongAng Ilbo, Aug. 18, Page 30

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