Fed Pauses Rate Increases Ahead of U.S. Midterm Elections
‘Need More Data Before Setting Policy Path’
Rate-Setting Meetings to Be Reduced From Eight a Year to Seven, Then Six
‘I’m More Interested in Korea’s Economy Than You May Think’
Calls BOK Governor Shin ‘A Very Capable Person’
The Federal Reserve left its benchmark interest rate unchanged at 3.75% to 4% at its Federal Open Market Committee meeting on Oct. 28. The decision followed a quarter-point increase last month and marked a pause in the rate-hike cycle. Fed Chair Kevin Warsh said at a press conference that the FOMC will gradually reduce the number of rate decisions starting next year.
‘U.S. Economy Expanding at a Strong Pace’
The decision to hold rates was approved by 10 of the FOMC’s 12 members. Fed Governor Lisa Cook and Cleveland Fed President Beth Hammack supported another quarter-point increase. In its policy statement, the committee said U.S. economic activity is “expanding at a strong pace.” That was stronger language than in its September statement, which described the economy as expanding at a “solid pace.”
The statement also offered an upbeat assessment of the broader economy. It said domestic spending continues to recover despite elevated geopolitical uncertainty. Productivity growth is strong and capital investment remains solid. The committee also said job gains are keeping pace with growth in labor supply, leaving the unemployment rate little changed. The message underscored the Fed’s priority on inflation over employment and added to market expectations for a December rate increase.
Still, the statement included new language saying that “the accumulation of additional information” will help guide future policy decisions. The change suggested the Fed will calibrate its pace after reviewing both economic and inflation data. Warsh said the recent rise in short-term inflation expectations reflects consumers taking a hard look at reality. Over a longer horizon, most households, businesses and financial markets remain confident that the central bank will restore price stability, he added.
Warsh also announced changes to how the Fed conducts monetary policy decisions, including the introduction of FOMC meetings with no rate vote starting next year. The committee now meets eight times a year, and Warsh said that remains an appropriate frequency. But policymakers do not need to make a rate decision at every meeting, he said. Next year, one of the FOMC’s eight meetings will be devoted solely to broader monetary policy strategy, with no vote on rates and no policy statement. By 2028, the number of rate-setting meetings will be reduced to six.
Warsh Highlights Interest in Korea’s Economy
Market reaction was muted. Stocks closed slightly lower after weak earnings from Google parent Alphabet weighed on sentiment. The yield on the 10-year U.S. Treasury briefly fell below 5% after the Fed decision before returning to around 5%. Some criticism also emerged over the decision to hold rates ahead of the U.S. midterm elections on Nov. 3. The probability of a quarter-point increase at the December FOMC meeting rose to about 80%.
Warsh also drew attention by expressing strong interest in South Korea’s economy, which is closely tied to the semiconductor industry. Asked by the Korea Economic Daily about the impact of balance-sheet runoff on offshore dollar markets such as South Korea’s and on institutions that hold U.S. Treasuries, Warsh said he is “more interested in Korea’s economy than you may think.”
He said much of the supply chain tied to the recent rapid expansion in technology comes from South Korea and Japan, with some also coming from Singapore. Looking at the Korean economy also helps show what kinds of goods are flowing into the U.S., he said. His comments suggested that growth in artificial intelligence and capital spending in the U.S. are closely linked to conditions in South Korea.
Warsh also spoke about his ties with Shin Hyun-song, governor of the Bank of Korea. “He is a very capable person and a good friend,” Warsh said. “I’m glad he has that job.” He recalled having extensive discussions with Shin 20 years ago during the global financial crisis about how central banks could use their balance sheets. On balance-sheet reduction, Warsh said the issue is being handled by a dedicated task force. The group will deliver its conclusions and recommendations to the FOMC early in the first quarter next year, he added.
Sang-eun Lee in Washington / Jung-soo Hwang in New York, Korea Economic Daily correspondents selee@hankyung.com