As the Federal Reserve (Fed·Federal Reserve) has held its base rate steady for five consecutive times, market interpretations diverge between a "hawkish hold" and a "dovish hold." Analysts project that how the Bank of Korea responds to the Fed's tightening stance could also influence whether an August "back-to-back" (consecutive base rate hikes) occurs.
According to the Bank of Korea and financial markets on the 30th, the Federal Reserve maintained its base rate at 3.50%–3.75% annually during the Federal Open Market Committee (FOMC) meeting held on the 28th–29th (local time). However, three out of twelve members expressed a minority opinion favoring a 0.25 percentage point interest rate hike.
In its statement, the Federal Reserve reaffirmed its commitment to price stability, stating that "inflation remains above the 2nd% target." Chairman Kevin Warsh also emphasized in a press conference that there is no softened inflation target, repeatedly stressing the 2nd% price goal. However, it maintained its existing position that future policy will be determined by comprehensively assessing economic indicators and financial conditions.
Market reactions to this were divided. Choi Je-min, an economist at Hyundai Motor Securities, stated, "The vote itself became more hawkish in July," adding, "The unchanged statement should not be interpreted as a dovish signal but rather as a decision to hold judgment, and the threshold for hikes has lowered." He further analyzed that "the risk of a 25 basis point hike in September has increased."
Conversely, some view it as a dovish hold. Park Sang-hyun, an economist at iM Securities, remarked, "Uncertainty related to interest rate policy has only grown," noting that "Chairman Kevin Warsh's recent emphasis on the fact that financial conditions have already tightened due to rising U.S. Treasury yields can be interpreted as meaning the Federal Reserve sees less need to actively pursue additional interest rate hikes."
Kim Yu-mi, an economist at Kiwoom Securities, also stated, "If the slowdown in inflation continues, we expect the base rate this year to remain on hold at current levels," adding that "this FOMC meeting confirmed a new operational approach by the Federal Reserve seeking to maintain tightening effects by utilizing market rates rather than policy rates."
In fact, financial markets reacted somewhat dovishly. The U.S. dollar showed weakness for two consecutive days, and short-term Treasury yields fell. In contrast, long-term Treasury yields rose, reflecting concerns about future inflation and fiscal burdens. Cumulative interest rate hike expectations through December this year, as reflected in federal funds futures, dropped from 1.7 times before the FOMC to 1.3 times after the meeting.
This is because Chairman Warsh did not clearly express his intention to raise rates nor provide forward guidance. In particular, by mentioning that he would monitor various price indices beyond just personal consumption expenditures (PCE), failing to present clear criteria for addressing inflation, the market broadly interpreted this meeting as "dovish."
Consequently, attention is now focused on how the Bank of Korea will interpret this FOMC. The Monetary Policy Board raised the base rate to 2.75% annually on the 16th, entering a monetary tightening cycle for the first time in three years and six months.
Last month, the Federal Reserve raised its year-end base rate projection in the dot plot from 3.4% to 3.8%, making the possibility of additional hikes within the year relatively clear. However, this time, despite minority opinions for a hike within the Federal Reserve, Chairman Warsh's cautious messaging and dovish interpretations by financial markets have created counterforces, leading analysts to conclude that the Bank of Korea's calculations for August have become even more complex.
Looking solely at domestic conditions, assessments suggest that the possibility of additional hikes remains open. This is because second-quarter real GDP growth reached 0.6% quarter-on-quarter, exceeding the Bank of Korea's forecast, and uncertainties regarding oil prices and inflation stemming from the Middle East persist. However, whether there will be a back-to-back hike in August is expected to depend on July consumer price and core inflation data to be released next month, as well as the Bank of Korea's judgment on this FOMC meeting.
in ECONOMY
