On September 19, Deputy Prime Minister Choi Sang-mok held an emergency Meeting on Macroeconomic and Financial Stability with related institutions[1] to assess the impact of the decision by the U.S.’s Federal Open Market Committee (FOMC) to cut the benchmark interest rate on domestic and international markets and to discuss response measures.

The following are key messages of DPM Choi’s remarks.

Last night, the U.S. Federal Reserve (Fed) decided to cut the benchmark interest rate by 50 bp (a range of 4.75%-5.0%) during the FOMC meeting, marking the first rate cut in four years and six months since March 2020.

The Fed revised its outlook for future rate cuts, increasing its projection for this year’s reduction from 25 bp to 100 basis points, and for next year from 125 bp to 200 basis points.

While the Fed lowered its inflation forecast, it raised the unemployment rate projections and emphasized its strong commitment to supporting full employment.

During the press conference, Chair Jerome Powell explained that the 50 bp cut was based on additional data since the July meeting. He also noted that the Fed could speed up or slow down the rate of cuts if necessary, and could even pause if deemed appropriate.

Global financial markets responded relatively calmly to the rate cut, as expectations for such a move had already been partly priced in.

The Fed’s pivot in monetary policy suggests a significant step away from the global multifaceted crisis that was triggered by an excess of liquidity during the pandemic response and the supply chain shocks caused by the Russia-Ukraine war.

However, as demonstrated by the sharp global stock market decline in early August, there remains the possibility of increased financial market volatility during the transition in monetary policy. In addition, geopolitical uncertainties remain high, with ongoing concerns about the Middle East, the Ukraine war, and the upcoming U.S. presidential election.

[Policy Response Direction ① : Risk Management]

In light of ongoing global uncertainties, the government will maintain a high level of vigilance and closely coordinate with relevant agencies to respond to changes in economic landscape at home and abroad.

Currently, the Korean financial market appears to be relatively stable, with corporate bond yields falling and short-term interest rates such as CP and CD rates also on a downward trend, facilitating smooth corporate funding.

However, given the persistent external uncertainties, the government will continue to operate a 24-hour joint monitoring system with relevant agencies. In addition, the government will do its utmost to maintain the stable response system so that market stabilization measures will be swiftly implemented according to the Contingency Plan in case of excessive market volatility.

The government will also meticulously manage risk factors related to household debt, the real estate market, and project financing (PF). While household loans, particularly mortgage loans, have increased following a rise in housing transactions, the impact of policies implemented in September is expected to gradually moderate the pace of growth.

Not only that, the government will expedite the implementation of the real estate supply measures announced in August 8. If the housing market overheats or household debt grows rapidly, additional management tools will be boldly applied in a timely manner.

In the case of real estate PF, the government will guide the market towards an orderly soft landing. The first-phase project viability assessments of real estate PF sites suggest that the impact on the financial and construction sectors is limited. Evaluations for other projects will be completed by November, after which a regular evaluation system will be carried out.

[Policy Response Direction ② : Revitalizing Domestic Demand and Restoring People’s Livelihoods Stability]

Although the recovery of the Korean economy has been supported by robust exports, the pace of domestic demand rebound has lagged.

However, recent developments, such as price stability and lower market interest rates, have alleviated constraints on domestic demand. Early signs of recovery in investment and service consumption are emerging, and real wages have turned positive for the first time in nine quarters, improving consumption capacity.

The government will work on further stabilizing perceived inflation and providing targeted support to low-income population, small business owners, and vulnerable sectors including construction. Furthermore, a pan-governmental initiative to promote investment will be fully activated, focusing on accelerating the improvement of domestic demand and people’s livelihoods.