[Editorial] Bracing for high interest rates and recession

The U.S. Federal Reserve delivered a widely expected hike of 50 basis points to moderate its galloping pace in rate increases. The U.S. central bank has taken a breather after an unprecedented four straight hikes of 75 basis points after confirming a softening of the runaway inflation. The U.S. consumer price index gained 7.1 percent on year in November. It is a relief that the most aggressive tightening cycle since the 1980s is tapering off.

But as the Fed keeps to its “higher for longer” mantra, the median estimate in the Fed’s quarterly summary of economic projections placed the end rate target at 5.1 percent in 2023. Since Fed Chair Jerome Powell made it clear that rates won’t come down, the U.S. rates in their highest level in 15 years would stay towering next year too. Although increases would slow and stall next year, rates won’t likely come down unless inflation returns to the 2 percent range.

The Korean monetary authorities which must keep up with their U.S. counterpart will be less burdened. The Bank of Korea (BOK) is expected to push up the base rate by another 25 basis points in January. Since BOK Gov. Rhee Chang-yong has estimated the end rate at 3.5 percent next year, the gap with the U.S. rate target could widen to 150 basis points from the current 125 percent. When the rate gap widens too much, foreign capital could exit and cause a weakening in the Korean won. As the biggest gap between Korean and U.S. rates is expected to last throughout next year, it could cause jitters to the currency and capital markets. The Korean government must heed to macroeconomic management, and enterprises and individuals also watch their balance.

Even if the U.S. rates are heading down, it cannot be good news. Despite the clear message on a lengthier tightening cycle from the Fed, bond yields fell in U.S. financial markets. The bond market is betting on U.S. rates reversing direction toward the end of next year, due to concerns about recession. When high interest rates turn lower, that could mean the economy must wrestle with a slump. Whatever the case, Korea would be hard on the economy.

To lessen the hardship from an economic downturn, regulatory and economic reforms must take place. President Yoon Suk-yeol on Thursday vowed to ease real estate regulations to stimulate demand. The harsh regulations against the overheated housing market must be relieved in a bust situation. Pension, labor, and education reforms are also essential for sustainability of the country to guarantee a stable future for the younger generation. The works call for bipartisanship. President Yoon must exercise political leadership to initiate the changes.