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US Monetary Policy Uncertainty to Persist, Impacting Korean Markets

The Bank of Korea warns that uncertainty surrounding US monetary policy is likely to continue despite market stability following the latest Federal Reserve decision. The interest rate gap between South Korea and the US remains at up to 1.25 percentage points, pressuring the Korean won. The BOK is expected to maintain its own prolonged rate pause to support financial stability and contain inflation. Experts caution that a wider rate spread could trigger foreign capital outflows and further weaken the local currency.

Key Points: US Monetary Policy Uncertainty to Persist, Says BOK Official

  • Fed holds rates steady
  • US-Korea interest rate gap persists
  • Korean won faces downward pressure
  • BOK maintains prolonged rate pause
  • Geopolitical risks add to market uncertainty
2 min read

Uncertainty surrounding US monetary policy likely to persist: BOK

BOK Deputy Governor warns of continued uncertainty in US monetary policy, affecting interest rate gaps and the Korean won's stability.

"Fed Chair Jerome Powell's press conference and the timeline for the nomination of his successor and other issues could lead to continued uncertainty over the U.S. monetary policy path. - Yoo Sang-dai"

Seoul, Jan 29

Uncertainty over the path of the United States' monetary policy is expected to persist, though markets have remained broadly stable following the Federal Reserve's latest interest rate decision, a senior official of the South Korean central bank said on Thursday.

On Wednesday (US time), the Fed kept its benchmark interest rate unchanged at the 3.5-3.75 percent range following three successive cuts since September, a decision that will continue to put the gap between the key rates of South Korea and the United States at up to 1.25 percentage points for the time being, reports Yonhap news agency.

"Fed Chair Jerome Powell's press conference and the timeline for the nomination of his successor and other issues could lead to continued uncertainty over the U.S. monetary policy path," Bank of Korea (BOK) Deputy Gov. Yoo Sang-dai said while presiding over a market assessment meeting.

"As uncertainties regarding U.S. tariff policies, concerns over the fiscal health of major economies and geopolitical risks continue to exist, we will remain vigilant and closely monitor market developments," he added.

During the press conference, Powell said the U.S. economy grew "at a solid pace last year and is coming into 2026 on a firm footing," while emphasizing that the Fed is "well positioned" to adjust the policy rate going forward based on incoming economic data.

Amid U.S. President Donald Trump's growing push to exert control over the Fed, Powell delivered a firm defense of central bank independence, describing it as a standard practice in every advanced economy and democracy worldwide.

Given the Fed's stance, the BOK is expected to maintain the prolonged rate pause.

In its latest policy meeting earlier this month, the BOK kept the key rate at 2.5 percent, marking the fifth consecutive on-hold decision since July, to support financial stability amid a weak won and to contain inflationary pressures.

The interest rate gap between South Korea and the U.S. has persisted since July 2022, and experts warn that a wider spread could trigger foreign capital outflows and further weaken the Korean won.

The local currency has remained well below the psychologically important 1,400 won level and fell to a multiyear low of under 1,480 won late last month, weighed down by the dollar's strength, geopolitical risks and heavy overseas securities investments by domestic investors.

The won opened at 1,429.6 per dollar on Thursday, down 7.1 won from the previous session.

- IANS

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Reader Comments

A
Arjun K
The part about central bank independence is crucial. Political pressure on the Fed from any administration is worrying. The RBI's autonomy has been a cornerstone of our economic stability. Hope that principle is respected everywhere.
R
Rohit P
Seeing the won struggle reminds me of our own rupee's challenges. When the dollar strengthens, it's not just Korea that feels the heat. Our import bill for oil and electronics goes up. Tough times for all emerging market currencies.
D
David E
As someone working in finance, the 1.25% rate gap is significant. It creates a constant pull for capital towards US assets. South Korea's BOK is in a difficult position—raise rates to defend the currency and risk hurting domestic growth, or hold and watch the won slide further. A classic policy dilemma.
S
Shreya B
The article mentions "geopolitical risks" – that's the real wild card. Tensions anywhere affect global investor sentiment. It makes long-term planning for businesses and central banks so difficult. Stability is what we need most.
V
Vikram M
While the analysis is good, I feel the article could have drawn a clearer parallel with other Asian economies. How are Japan, Taiwan, or India positioned in comparison? The Fed's policy doesn't affect everyone equally. A comparative view would be more insightful.

We welcome thoughtful discussions from our readers. Please keep comments respectful and on-topic.

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