The head of the U.S. Federal Reserve told a symposium of central bank chiefs from around the world that he will continue to hike interest rates to tame inflation. “We are taking forceful and rapid steps to moderate demand so that it comes into better alignment with supply and to keep inflation expectations anchored,” Fed Chairman Jerome Powell said. “These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain. We will keep at it until we are confident the job is done.” In the same meeting a year ago, Powell said inflation was “transitory” and caused by supply chain shocks.
His unusually strong words poured cold water on hopes of a slower pace of rate hikes as U.S. inflation had peaked. Analysts now expect the Fed to raise the key interest rate from the current 2.5 percent to 3.25 percent in September. U.S. stock markets plummeted on the news.
The interest rate hikes are sending investors to the safe-haven U.S. dollar, dealing a heavy blow to financial markets around the world. The Korean economy, saddled with W1.9 quadrillion worth of household debt, is no exception (US$1=W1,331). The Bank of Korea has raised the key rate two percentage points since August last year, resulting in an additional W27 trillion in annual interest burden. If the BOK boosts the rate further to three percent, that will rise by another W7 trillion. The Korean economy has already been hit hard by a realignment in global supply chains triggered by the Russian invasion of Ukraine and the resultant rise in raw material prices, suffering a record $1.5 billion trade deficit until July of this year.
The best way to deal with inflation, as Powell said, is for governments, businesses and households to tighten their belts and boost production to achieve higher economic growth. In order to minimize the pain, lawmakers must play a key role. They must stop scoring cheap political points and enact policies that help households mitigate debt and ease regulations to motivate businesses to invest.
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