By Dr. Jeffrey I. Kim
.jpg/dims/resize/740/optimize) |
Prior to its announcement of the rate freeze, there was strong speculation of a rate hike among the key members of the National Assembly and some economists. They were afraid the widening gap between the U.S. federal funds rate and Korea's base rate would cause massive capital outflows.
By contrast, other people were afraid a rate hike this time would critically raise the households' debt burden and at the same time it would jeopardize GDP growth and employment.
The BOK revised down the nation's growth projection for 2018 from 2.9 percent to 2.7 percent. It also cut the figure for 2019 from 2.8 percent to 2.7 percent.
The lower growth forecast has put the central bank and the government in dilemma.
The interest rate policy dilemma is commonplace in many other countries because interest rate policy results in both positive and negative economic effects.
If the central bank raises its interest rate, this could ease inflationary pressure, while discouraging domestic investment and helping to keep housing prices stable.
Compared to Korea, the U.S. interest rate policy brings about more issues and problems economically as well as politically. At the moment, independence of the U.S. central bank is put to the test.
The Fed chairman, Jerome Powell, has been under a politically difficult situation. He was appointed by President Donald Trump. Yet he had to turn down Trump's request not to raise the Fed's benchmark rate more than twice. That must have made Trump mad.
In spite of the president's plea, the Federal Open Market Committee (FOMC) raised its base rate by 25 basis points from the target range of 1.75-2.00 percent Sept. 28. Then on Oct. 1, the New York stock market crashed.
Trump got angry and rebuked the Fed chair, by shouting, "The Fed has gone crazy!" At an interview with a TV station, Trump called the Fed raising base rates his biggest threat.
Trump said in an interview with CNBC that he was not happy with the Fed's decision to raise interest rates thrice so far this year. Trump must have been deeply concerned about the weakening competitiveness of U.S. manufacturing on the global markets. He was shocked when he witnessed the stock prices plunging drastically.
On the other hand, Powell defends himself by pointing out the fact that GDP growth is strong, labor market is strong and inflation is near the 2 percent target.
The U.S. unemployment rate has been falling from 3.9 percent in July to 3.8 percent in August and further down to 3.7 percent in September. With this economic performance, Powell strongly believes the Fed's gradual rate-hike policy is well justified.
As we observe the two parties, President Trump and Fed Chair Powell exchanging criticisms with each other, we feel that both may be right.
Powell was confident with the performance of the U.S. macro-economy whereas Trump was concerned about continual weakening of U.S. industries, including the manufacturing sector.
Within a month or so, Korean people will have a hot debate again over whether the BOK should raise or lower the base rate or keep the rate at the same level. Their decision will depend on the economic and political conditions in November.
The mandate of the BOK is to ensure financial and price stability. In addition, the central bank needs to prevent the bubbles of housing prices and massive capital outflows.
Prof. John Taylor of Stanford University, the inventor of the Taylor Rule, argued recently that interest rate policy alone cannot achieve all these objectives.
The central banks of non-reserve-currency countries should also closely watch the movement of financial liquidity which directly affects the transactions of real estate and other assets.
Policymakers should focus on the statistical data showing the economic performances, industrial competitiveness and business activities.
Dr. Jeffrey I. Kim (ickim@skku.ac.kr), former foreign investment ombudsman, is a professor emeritus at Sungkyunkwan University. He earned a Ph.D. in economics at the University of Chicago and taught at the University of Colorado, Boulder, and the American University, Washington, D.C.
![[PHOTOS] World Cup 2022 England vs Wales](https://img.koreatimes.co.kr/upload/newsV2/images/darkroom_uk021_fc18365b22fde.jpg/dims/resize/178/optimize)
![[INTERVIEW] 34-year-old permaculture farmer runs zero-waste shop in Gangneung](https://img.koreatimes.co.kr/upload/thumbnailV2/eac5bdaf4f8f4a3d93793756426943e5.jpg/dims/resize/178/optimize)
![[INTERVIEW] Kim Young-kwang satisfied with his psychotic killer role in 'Somebody'](https://img.koreatimes.co.kr/upload/thumbnailV2/b2858ac307f0413e88ead173afff4586.jpg/dims/resize/178/optimize)
![[PHOTOS] World Cup 2022 Argentina vs Poland](https://img.koreatimes.co.kr/upload/newsV2/images/ARGENTINA001_2c8d3fa5c08bc.JPG/dims/resize/268/optimize)
![[PHOTOS] World Cup 2022 England vs Wales](https://img.koreatimes.co.kr/upload/newsV2/images/darkroom_uk021_fc18365b22fde.jpg/dims/resize/268/optimize)
