The U.S. Federal Reserve (Fed) has frozen interest rates during its first Federal Open Market Committee (FOMC) meeting of the year, drawing attention to the Bank of Korea's upcoming rate decision scheduled for next month. With concerns over economic sluggishness growing due to the state of emergency, many predict an interest rate cut in the immediate future; however, some believe that if the pace of rate cuts in the U.S. slows down, the Bank of Korea may also adjust its pace.

◇ Fed freezes interest rates at 4.25~4.50%... unanimous decision

During the FOMC meeting held on Jan. 28-29 (local time), the Fed decided to keep the policy rate unchanged at the existing 4.25~4.50% per year. The Fed's rate-cutting journey, which began with a 0.5 percentage point reduction last September, has momentarily come to a halt. This decision was made unanimously.

Federal Reserve Chair Jerome Powell is speaking at a news conference after the Federal Open Market Committee meeting held on the 29th (local time) at the Federal Reserve Bank in Washington D.C. /Courtesy of AFP Yonhap News

On this day, the Fed noted that the U.S. economy is expanding at a robust pace. In a statement, the Fed evaluated that "the unemployment rate has stabilized at a low level over the past few months, and the job market remains strong," but added that "inflation remains somewhat elevated."

Chair Jerome Powell echoed similar sentiments during the subsequent press conference. He said, "If the economy continues to remain strong and inflation is not steadily moving towards 2%, we can maintain policy patience for a longer time," noting that "there is no need to rush to adjust the policy stance."

The uncertainty surrounding the policies of the Trump administration was also cited as a factor in the decision to freeze rates. Powell remarked, "We still don't know what will happen regarding tariffs, immigration, fiscal policy, and regulations," and added, "I want to see consecutive figures showing a slowdown in inflation."

On Wall Street, the Fed's decision was interpreted as "hawkish." Deutsche Bank forecasted that, "Given that the Fed has made it clear it does not need to rush additional rate cuts, it seems unlikely we will see rate cuts in March." Citibank assessed that, "Rate cuts will resume again starting from the May meeting."

◇ Bank of Korea leans towards rate cuts in February... 'Additional cuts may be delayed'

As a result of this decision, the interest rate gap between the U.S. and South Korea remains at 1.5 percentage points (Korea 3.0%, U.S. 4.5%, upper limit basis). South Korea's base rate has been lower than that of the U.S. since July 2022, during the peak of the COVID-19 pandemic, and this inversion has lasted for two and a half years.

Bank of Korea Governor Lee Chang-yong is opening the Monetary Policy Committee at the Bank of Korea on the 16th. /Courtesy of News1

Market expectations suggest that the Bank of Korea will implement rate cuts at the Monetary Policy Committee meeting next month. This is due to the fallout from the state of emergency declared last December, which led to South Korea's Gross Domestic Product (GDP) growing by just 2.0% (preliminary figure) compared to the previous year, a weak performance. This is below the forecast of 2.2% presented by the Bank of Korea in November.

The 'forward guidance' released during the Monetary Policy Committee meeting held on the 16th also raised the possibility of rate cuts. At that time, all six members of the committee expressed the view that the possibility of rate cuts within three months should not be excluded.

Baek Yun-min, a researcher at Kyobo Securities, stated, "The Bank of Korea has made the February cut a foregone conclusion at last month's Monetary Policy Committee meeting, so barring special circumstances, I believe they will lower the rate this time." He added, "Considering the domestic economy, it will be difficult for the Bank of Korea not to cut rates."

However, there are perspectives indicating that the timing of additional cuts may be somewhat delayed due to this FOMC decision. Jo Yong-gu, a researcher at Shinyoung Securities, commented, "The freeze on U.S. rates could influence the speed of the Bank of Korea's rate cuts and the extent of cuts this year," stating that "the timing of the second cut may be delayed, or the extent of cuts could be limited to two occurrences (50 basis points)."