The U.S. Federal Reserve (Fed) decided to keep the benchmark interest rate unchanged despite pressure from President Donald Trump to lower rates. This marks the third consecutive rate freeze following the ones in January and March. As the Fed adopts a cautious stance, market attention is turning towards the Bank of Korea's interest rate decision scheduled for the end of this month. Currently, there are strong expectations for a rate cut due to concerns about slowing growth, but there are also worries that the increase in household debt and the widening interest rate gap between South Korea and the U.S. could become burdensome.
◇ Fed maintains benchmark interest rate at 4.25% to 4.50%... third consecutive freeze
On the 7th (local time), the Fed decided to maintain the benchmark interest rate at its current level of 4.25% to 4.50%. This marks the third consecutive freeze since the January FOMC meeting held after the inauguration of the Trump administration, and the decision was unanimous. As a result, the interest rate differential with South Korea remains at 1.75 percentage points (at the upper limit, South Korea 2.75%).
The Fed cited policy uncertainty as the background for the rate freeze. In a statement, the Fed noted that "uncertainty regarding the economic outlook has increased." The phrase "more" was added compared to last month. The Fed also included a new phrase indicating that "the risks of rising unemployment and inflation have increased," suggesting that the level of uncertainty has risen.
Jerome Powell, the Fed chair, also made it clear that he intends to delay a rate cut. He stated, "The administration has entered into tariff negotiations with trading partners, making it difficult to predict what level tariffs will reach," adding, "Now is the time we need to wait." He also noted that "if tariffs are imposed as expected, we may not see progress toward dual mandates (price stability and full employment) over the next year."
He drew a line on concerns about a U.S. recession. Powell said, "Actual economic data does not show such a situation (recession) occurring," noting that "consumers continue to use their credit cards well and the economy is in a healthy state." However, he mentioned that if unemployment and inflation rise simultaneously and both factors become tense, monetary policy will prioritize the more serious condition.
Expectations for a significant rate cut in Wall Street have diminished. Morgan Stanley stated, "Powell did not mention a recession and will face a challenging situation where he must balance price and employment going forward," adding that "large-scale rate cuts appear unlikely." BNP Paribas also noted that "the possibility of a rate cut in the near term is expected to be low."
◇ South Korea likely to lower rates in May over growth slowdown concerns
Market attention is shifting towards the Monetary Policy Committee of the Bank of Korea. Although the Bank froze the benchmark interest rate at 2.75% last month, all six members of the committee, excluding the governor, left open the possibility of a rate cut within three months, raising expectations for a cut in May. Bank of Korea Governor Lee Chang-yong also emphasized to reporters while visiting Milan, Italy, for the Asian Development Bank (ADB) annual meeting that "there should be no doubt about lowering the benchmark interest rate."
The primary reason for the high likelihood of a cut by the Bank is the clear signals of economic slowdown. The gross domestic product (GDP) for the first quarter, announced on the 24th of last month, shrank by 0.2% compared to the previous quarter, marking a return to negative territory after three quarters. This figure significantly fell short of the forecast of +0.2% presented by the Bank in February. As a result, achieving the annual growth forecast of 1.5% has become difficult.
The primary rationale for the rate freeze by the committee concerning exchange rate instability has somewhat eased. The exchange rate, which soared to 1,487 won last month, is currently below 1,400 won as of the 8th. The domestic political instability due to the impeachment of former President Yoon Suk-yeol has calmed down, and progress in U.S.-China tariff negotiations has reduced external uncertainties. In particular, as the exchange rate has become a key issue in South Korea-U.S. trade, the likelihood of foreign exchange authorities tolerating the strength of the won has increased.
Kim Ji-na, a researcher at Eugene Securities, noted that "the next cut is expected to be in May," adding that "while there may be expectations of a cut in July due to early elections and tariff uncertainties, delaying the cut seems to offer little benefit." Moon Hong-cheol, a researcher at DB Financial Investment, also said, "The possibility of a May cut is high," stating that "given the visible economic slowdown, the interest rate will be lowered to prevent downside risks to the economy."
However, the increasing trend in household debt and the widening interest rate gap between South Korea and the U.S. are factors that may constrain rate cuts. According to financial authorities, household loans across the financial sector are estimated to have increased by more than 5 trillion won last month. In May, household debt could further increase due to the impact of a lifting of land transaction permit zones and expanded consumption during Family Month. Additionally, the widening interest rate gap between South Korea and the U.S. could accelerate the outflow of foreign capital.
The Bank plans to respond cautiously while monitoring the U.S. Fed's monetary policy. Deputy Governor Yoo Sang-dae held a 'market situation review meeting' on the morning of the 8th and evaluated that "the overnight FOMC results did not deviate significantly from market expectations, and the international financial market showed a generally stable trend," adding that "given the possibility that volatility in financial and foreign exchange markets could expand at any time, we will closely monitor the market situation with vigilance."