The Federal Reserve (Fed) has frozen the key interest rate. This marks the fourth consecutive freeze following the freezes in January, March, and May. As the Fed adopts a cautious stance, the market's attention is shifting towards the Bank of Korea's upcoming interest rate decision scheduled for next month. For now, there is a high possibility of maintaining the freeze as the effects of last month's rate cut and the rise in household debt are being monitored.
◇ Fed holds key interest rate steady for fourth consecutive time at 4.25% to 4.50%
During the Federal Open Market Committee (FOMC) regular meeting held on the 17th and 18th (local time), the Fed decided to maintain the key interest rate at its current level of 4.25% to 4.50%. This is the fourth consecutive freeze since the FOMC meeting held in January, the first after the Trump administration began, and this decision was unanimous. Consequently, the interest rate difference with Korea has become 2.00 percentage points (upper limit, Korea 2.50%).
The Fed explained that uncertainties regarding the economic situation led to the freeze. In a statement, the Fed noted, "While uncertainties about the economic outlook have lessened, they remain high." In a subsequent press conference, Fed Chair Jerome Powell also emphasized, "Although uncertainty peaked in April and has since eased, it remains elevated. It is still a time for caution."
This perspective was reflected in the Summary of Economic Projections (SEP) released that day. The Fed presented its forecast for this year's Gross Domestic Product (GDP) growth rate at 1.4%, a reduction of 0.3 percentage points from the previous estimate of 1.7% made in March. The price indicator, the Personal Consumption Expenditures (PCE), is expected to rise by 3.0% year-on-year by the end of this year, which is also 0.3 percentage points higher than three months ago.
However, the assessment of unemployment and inflation has been eased. The phrase in the previous statement regarding the risks of "higher unemployment and higher inflation" has been removed. This seems to reflect the fact that the unemployment rate has remained at 4.2% for several months, and inflation has shown signs of slowing.
The Fed also maintained its outlook of two rate cuts this year. According to the 'dot plot' that collects interest rate projections from FOMC Commissioners, the forecast for the end of this year remains at a median of 3.875%, unchanged from three months ago. For 2026, the median forecast has been adjusted upward from 3.375% to 3.625%, and for 2027, it has risen from 3.125% to 3.375%.
◇ Korea-U.S. interest rate gap at 'historical high'... Bank of Korea likely to hold steady
Market attention is expected to shift towards the Bank of Korea's Monetary Policy Committee. Last month, the Bank of Korea lowered the key interest rate to 2.50% with unanimous consent from the Monetary Policy Committee members. Among the six members, excluding the governor, four have kept open the possibility of another rate cut within three months. As a result, after the committee meeting at that time, there were predictions in the market that the Bank of Korea would implement another rate cut as early as July.
However, the Fed's decision has made it difficult for the Bank of Korea to hastily lower interest rates. With the Korea-U.S. interest rate gap at a historical high of 2.00 percentage points, if the Bank of Korea lowers rates further, it could accelerate the outflow of foreign capital. On the 12th, Governor Lee Chang-yong expressed concern in a speech celebrating the 75th anniversary of the Bank of Korea that "depending on the pace of the rate cuts by the U.S., the interest rate gap could widen further, and uncertainties regarding trade negotiations could increase, potentially leading to renewed volatility in the foreign exchange market."
The rising trend in household debt is also a constraint on rate cuts. According to the financial commission's report on 'household loan trends in May', the volume of housing loans increased by 5.6 trillion won last month, a greater increase compared to the previous month (4.8 trillion won). Since the lifting of the land transaction approval system in February this year, housing transaction volumes have risen during the reassignment process, and recently, housing market sentiment has rebounded, showing signs of overheating.
However, as the economic slowdown persists, demands for rate cuts are expected to grow louder. The Bank of Korea recently revised its economic growth forecast for this year down from 1.5% to 0.8%. The growth forecast for next year has also been adjusted down from 1.8% to 1.6%. The uncertainties in global trade have increased due to Donald Trump's reciprocal tariff policy, leading to a judgment that both exports and domestic demand will slow.
Cho Yong-gu, a researcher at Shinyoung Securities, noted, "As real estate prices rise in the metropolitan area and household debt increases, it will be difficult to implement a rate cut next month. However, if the government pursues an expansionary fiscal policy through a supplementary budget, it would be fundamentally more effective for economic stimulus to align with interest rate cuts, so there is a possibility of lowering rates in August."
The Bank of Korea plans to monitor market conditions before making any rate decisions. On that day, the Deputy Governor Park Jong-woo chaired a 'market situation monitoring meeting' to discuss future response directions. During this meeting, Deputy Governor Park stated, "As geopolitical risks, such as the recent military conflict between Iran and Israel and concerns over escalation, have significantly increased, we will carefully monitor the market situation with particular vigilance regarding the potential for increased volatility in financial and foreign exchange markets."