Bracing for rate hikesThe United States is trumpeting a lifting of the benchmark rate target range. What was hinted at from last year is ready to pan out. During its first policy meeting for this year on Jan. 25-26, the Federal Open Market Committee (FOMC) made it clear that it is moving away from loose monetary policy. Last Wednesday, Fed Chair Jerome Powell said, “Most FOMC participants agree that labor market conditions are consistent with maximum employment in the sense of the highest level of employment that is consistent with price stability.”
The Fed has been cautious in raising interest rates despite inflationary dangers in order not to disturb the economic recovery from the pandemic. The U.S. economy has been faced with extraordinary inflationary due to jittery global supply chains amid the ongoing pandemic. The unemployment rate has fallen to 3.9 percent, but the consumer price index rose 7 percent on year in December, far from the Fed’s 2.0 percent target and the fastest gain in 40 years.
Powell said the central bank was ready to raise interest rates from March, given the developments in prices and the labor market. Experts now predict the Fed could implement three to seven hikes this year. The move has triggered a shockwave across the globe. After foreign investors reduced their share of risky assets in global markets, it caused a plunge in share prices and currency values in emerging markets. The Kospi skidded for five consecutive sessions to the brink of 2,600 after losing 2,700 over a day. The U.S. dollar jumped beyond 1,200 won and may appreciate further due to the Ukraine crisis.
Korea could face a greater danger from overly-leveraged investments and fiscal spending. The lives of home buyers who rushed to purchase apartments despite an abnormal jump in prices from the government’s real estate policy failures could be hurt as they took out loans from second-tier lenders after banks cut back on lending.
Greater government spending poses another danger. The government issued over 100 trillion won in debt annually in recent years to cover its budgets. As a result, interest rates in the market are soaring. The phenomenon could aggravate conditions for small businesses and individual debtors. Still, the National Assembly is carefree and wants to draw up one bigger supplementary budget after another. Presidential candidates must regard our economic situation with gravity and come up with measures to brace for new dangers.