Fed rate cut gives BOK more room to maneuver
The 25 basis point key rate cut by the U.S. Federal Reserve, Wednesday (local time), will allow the Bank of Korea (BOK) to have more discretion in its monetary policy, the central bank head said Thursday.
The Fed reduced its benchmark short-term rate to the range of 1.75 percent to 2 percent, with officials suggesting they were open to another cut before the year’s end.
The cut, which is the second in just two months, is considered a move to support the U.S. economy in a time of elevating uncertainty, with the drawn-out trade feud with China showing no signs of abating. “It is true that the Fed’s rate cut gives us more room to maneuver in implementing monetary policy,” BOK Governor Lee Ju-yeol told reporters.
“No major fluctuation was observed in the U.S. financial markets including stocks and treasury yields, an indication that the rate cut was largely in line with market expectations,” he said.
Stocks ended slightly higher, hours after falling on the Fed’s announcement and Treasury yields barely moved.
While the rate cut came despite a lack of clear signals, Lee said the Fed has not ruled out a further cut given Chairman Jerome Powell’s continued, consistent stance on helping support economic expansion.
“The Fed chairman said he would take appropriate actions to help sustain economic growth, so it does not mean that the Fed considers a rate cut as not an option,” he said.
Chief among the factors in determining Korea’s key rate will be external uncertainties, notably the U.S.-China trade dispute, Lee said.
“The rate-setting monetary policy board considers growth, consumer prices and financial stability among other factors. Adding to our concerns are recently heightened geopolitical risks which we will continue to monitor closely,” he said.
The recent attack on key oil facilities in Saudi Arabia also bears close monitoring, as the subsequent oil price spike could have grave implications for the economy, Lee said.
“A rise in oil prices will have a substantial impact on the Korean economy. However, the recent outbreak of African swine fever is not having as big of an impact at the moment,” Lee said.
The BOK is under growing pressure to lower its key base rate as the Korean economy seems to be entering a so-called new normal of “three lows” — growth, interest rates and inflation — a rather bleak combination of economic conditions already in progress in many advanced countries.
The much-feared economic conditions are fast becoming a reality after consumer prices dropped in August, the first time in the 54 years that the statistics authorities have been compiling relevant data.
The BOK cut its key rate to 1.5 percent from 1.75 percent in July, but left it unchanged in August. The next rate cut is expected Oct. 16.
WASHINGTON (AP) — A sharply divided Federal Reserve cut its benchmark interest rate Wednesday for a second time this year but declined to signal that further rate cuts are likely this year.
The Fed’s move reduced its key short-term rate — which influences many consumer and business loans — by an additional quarter-point to a range of 1.75 percent to 2 percent.
The action was approved 7-3, with two officials preferring to keep rates unchanged and one arguing for a bigger half-point cut. The divisions on the policy committee underscored the challenges for Chairman Jerome Powell in guiding the Fed at a time of high economic uncertainty.
The Fed did leave the door open to additional rate cuts — if, as Powell suggested at a news conference, the economy weakens. For now, he suggested, the economic expansion appears durable in its 11th year, with a still-solid job market and steady consumer spending.
At the same time, the Fed is trying to combat threats including uncertainties caused by President Donald Trump’s trade war with China, slower global growth and a slump in American manufacturing. The Fed noted in its statement that business investment and exports have weakened.
Financial markets closed mostly higher after the Fed’s afternoon announcement although the diverging opinions on the Fed left some investors uncertain how many more rate cuts the Fed will deliver. The Dow Jones Industrial Average after being down most of the day finished up 36.28 points, or 0.1 percent, to 27,147.08.
At his news conference, Powell acknowledged that Fed officials are sharply divided about the wisest course for interest rates, especially given uncertainties, like trade conflicts, whose outcomes are out of the Fed’s control.
“This is a time of difficult judgments and disparate perspectives,” the chairman said.
In any case, many business leaders are skeptical that the Fed’s slight rate cuts will deliver much economic benefit.
Wednesday’s rate cut “makes virtually no difference to the U.S. economy in and of itself,” said Jamie Dimon, CEO of JPMorgan Chase, who suggested, as many corporate leaders have, that Trump’s trade war remains an overarching threat.
“I don’t think cutting rates will offset trade, personally,” said Dimon, head of the largest U.S. bank.
Among Powell’s challenges is that the trade war’s uncertainties are likely affecting the nation’s economic data, making it hard for the Fed to set an interest-rate policy for the months ahead.
“It doesn’t make sense to commit to a path of policy today when monetary policy is now responding to future developments in the trade policy,” said Bill Adams, a senior economist at PNC Financial Services.
Wednesday’s modest rate cut irritated Trump, who has attacked the central bank and insisted that it slash rates more aggressively. The president immediately signaled his discontent:
“Jay Powell and the Federal Reserve Fail Again,” Trump tweeted. “No ‘guts,’ no sense, no vision! A terrible communicator!”
Asked about Trump’s latest personal taunt, Powell declined, as he has before, to respond directly, while adding that the Fed’s long-standing independence from political pressures “has served the public well.”
Updated economic and interest rate forecasts issued Wednesday by the Fed show that only seven of 17 officials foresee at least one additional rate cut this year. And at least two Fed officials expect a rate hike next year. None of the policymakers foresee rates falling below 1.5 percent in 2020 — a sign that the turbulence from a global slowdown and Trump’s escalation of the trade war is viewed as manageable.
The median forecasts show the economy is expected to grow a modest 2.2 percent this year, 2 percent next year and 1.9 percent in 2021. Those forecasts are well below the Trump administration’s projection that the president’s policies will accelerate growth to 3 percent annually or better. But they also suggest that policymakers do not envision a recession.
Unemployment is projected to be 3.7 percent and inflation 1.5 percent, below the Fed’s target level of 2 percent
A resumption of trade talks between the Trump administration and Beijing and a less antagonistic tone between the two sides have supported the view that additional rate cuts might not be necessary. So has a belief that oil prices will remain elevated, that inflation might finally be reaching the Fed’s target level and that there are increasing signs that the U.S. economy remains sturdy.
The job market looks solid, wages are rising, consumers are still spending and even such sluggish sectors as manufacturing and construction have shown signs of rebounding.