The U.S. Federal Reserve (Fed) held the benchmark interest rate steady at the March Federal Open Market Committee (FOMC) meeting. This marks the second consecutive hold following January. As the Fed adjusts the pace of interest rate cuts, attention turns to the Bank of Korea's (BOK) decisions on rates. Experts predict the BOK will take a wait-and-see approach regarding the tariff policy of the Donald Trump administration.
◇ Fed holds benchmark rate steady at 4.25% to 4.50% for the second consecutive time
The Fed decided to maintain the benchmark interest rate at 4.25% to 4.50% during the FOMC meeting held on the 19th (local time). This is the second consecutive hold since the January FOMC meeting, which was the first after the inauguration of the Trump administration. As a result of this decision, the interest rate gap with South Korea remains at 1.75 percentage points (upper limit basis, Korea 2.75%).
In a dot plot released on the same day, the Fed presented a forecast of 3.9% for the benchmark interest rate (median value) by the end of the year. Assuming a reduction of 0.25 percentage points (p) at a time, this suggests two rate cuts by the end of the year. This aligns with last December's forecast.
The background for the rate hold is the uncertainty in the economy. Jerome Powell, the Fed chair, noted, "The uncertainty in economic forecasts due to changes in trade policy is exceptionally high," adding, "There is no need to rush policy adjustments." This contrasts with the previous meeting's assessment by the FOMC, which stated that "the risks to achieving employment and inflation targets are nearly balanced."
The recently released Summary of Economic Projections (SEP) data also reveals a cautious stance. The Fed downgraded its forecast for U.S. GDP growth this year from 2.1% to 1.7%. The personal consumption expenditures (PCE) inflation rate estimate, which the Fed emphasizes, was raised from 2.5% to 2.7%. The year-end unemployment rate forecast was slightly increased from 4.3% to 4.4%.
Wall Street assessed that the Fed's vigilance towards inflation has slightly increased. Bank of America (BOA) stated, "While maintaining two rate cuts this year, the distribution has slightly shifted," and it added, "Considering the uncertainties and risk assessments in the forecasts, it indicates a growing caution towards stagflation (rising prices amid economic recession)."
UBS remarked, "This economic forecast appears to account for future inflationary pressures," noting that "the distribution in the dot plot has shifted slightly towards a hawkish stance compared to before." BNP stated that "the Fed Commissioners assessed that the downside risks to growth are high and the upside risks to inflation are also high."
◇ BOK rate cut likely to skip April… “Monitoring exchange rate and household debt volatility”
As the Fed adjusts the pace, attention is also focused on the timing of the Bank of Korea's additional interest rate cuts. The BOK lowered the benchmark rate from 3.5% to 3.25% last October, ending a tightening cycle that had lasted for three years and two months. Since then, it has also carried out additional cuts in November last year and February this year, lowering the benchmark rate to the 2.75% range.
Some believe that the BOK will not rush to cut rates, monitoring the effects of the February rate cut for the time being. This is because a widening interest rate gap between South Korea and the U.S. could increase volatility in the exchange rate. Currently, the won-dollar exchange rate fluctuates around the 1450 won level due to domestic political instability and the uncertainty of Trump's tariff policies. The exchange rate exceeding 1450 won is the first time since March 2009 during the global financial crisis.
Rising household debt is also a burdensome situation. Last month, household loans in the financial sector increased by 4.3 trillion won, marking the largest increase in four years since February 2021 (+9.7 trillion won). Housing loans surged by 5 trillion won compared to the previous month, leading the increase in household loans. Recently, after the lifting of the land transaction permission zones in Seoul, the rise in housing prices and increase in transaction volume have raised the possibility of a further increase in household debt.
Jang Yong-sung, a Commissioner of the Monetary Policy Committee, held a press briefing at the BOK's branch on the 19th, stating, "From the perspective of the BOK's financial stability goals, we are monitoring the increase in transaction volume and rising housing prices in the Gangnam area (Gangnam-gu, Seocho-gu, Songpa-gu) quite closely," adding, "The exchange rate is still maintaining a high level despite the decline in the dollar index (DXY), so there remains concern."
Experts anticipate the timing of the BOK's additional cuts in May or July. Baek Yoon-min, a researcher at Kyobo Securities, stated, "At the last Monetary Policy Committee meeting, most of the Commissioners agreed on the need for cuts but expressed concerns about the potential for increased external risks," and added, "The BOK is expected to lower rates in May after observing the effects of the U.S. tariffs imposed in April."
Jo Yong-gu, a researcher at Shinyoung Securities, mentioned, "I see the BOK's rate cut timing as July," adding, "The exchange rate is still at a high level, and housing prices have risen since the lifting of the land transaction permission zones, stimulating household debt. It will not be easy for the BOK to lower rates from a financial stability perspective."
Yoo Sang-dae, Deputy Governor of the BOK, remarked during a market situation assessment meeting held in the BOK headquarters in Jung-gu, Seoul, on the morning of the same day, "Future uncertainties such as the path of the Fed's monetary policy, the promotion of U.S. tariff policies, and geopolitical risks in the Middle East and Ukraine will persist," adding, "As external risk factors intertwine with domestic political and economic conditions, there is a possibility of increased volatility in domestic financial and foreign exchange markets."