Financial markets rally on Fed relief

Seoul officials heaved a sigh of relief Thursday, as a U.S. move to end the seven-year era of near-zero interest rates led to no major turmoil in global and local markets as some feared. 

On the contrary, financial markets rallied across Asia, as the U.S. Federal Reserve on Wednesday delivered just what markets had expected -- a small rise in interest rates and a clear signal of a slow tightening cycle to follow.

“There seems to be little need now to worry about the negative (immediate) impact of the U.S. interest rate hike on markets,” Bank of Korea Gov. Lee Ju-yeol told reporters in Seoul on Thursday.

The government and central bank officials had been on alert over a potential fallout of the U.S. rate decision, saying they were ready to intervene if there was excessive volatility in the markets. 

In a unanimous decision, the Fed increased its benchmark rate by a quarter basis points to 0.25-0.50 percent range -- its first hike since 2006, indicating that it has moved on from the 2007-8 credit crunch and global financial crisis. The decision marks the onset of a tightening cycle, which Fed Chair Janet Yellen said would be “gradual.”

Korea’s financial markets strengthened Thursday, as the most-anticipated event in recent weeks finally came to pass with no surprise. The U.S. rate change has long been expected and is already priced into the markets, analysts said. 

The benchmark KOSPI index closed 0.43 percent higher at 1,977.96 points, while the tech-heavy KOSDAQ inched 1.67 percent up to end at 658.11. The local currency fells slightly versus the greenback to 1,180.1 won per dollar. 

Across Asia, shares jumped. Japan’s Nikkei ended up 1.6 percent and Australian stocks climbed 1.6 percent, while Shanghai put on 1.7 percent. MSCI’s broadest index of Asia-Pacific shares outside Japan firmed 0.7 percent.

Looking ahead, however, the path for Korea is murky, with the economy saddled with flagging exports, still-weak domestic demand, high household debt and low inflation. 

Higher interest rates in the U.S. will likely prompt a reversal of capital flows from emerging markets to the U.S. To prevent the outflow, countries will have to consider raising their own interest rates, but such a move would have major implications on domestic economic conditions.
 
Due to such complexity, experts here are widely divided over what course of action the BOK should take going forward, with diverse opinion on the need for a rate hike. Korea’s key interest rate currently stands at a record low of 1.5 percent, unchanged since June. 

Announcing the first rate hike in close to a decade, the Federal Open Market Committee noted in a press statement that it “expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.” 

Separately, U.S. policymakers forecast an appropriate rate of 1.375 percent at the end of 2016, the same as September, implying four quarter-point increases in the target range next year, based on the median number from 17 officials.

The BOK Gov. Lee noted that Korea will have to watch out for other difficulties stemming from slowing growth in the world’s second-largest economy, China.

“We must keep our eyes open as there exist many other uncertainties in addition to a U.S. rate hike, such as slowing economic conditions in China and additional cuts in oil prices,” he said. 

By Lee Sun-young (milaya@heraldcorp.com">milaya@heraldcorp.com)