US Federal Reserve Likely to Raise the Interest Rate

There’s a feeling that the United States Federal Reserve will soon raise the interest rate. The Fed Beige Book analysis, published on Dec. 3, stated:

“Reports from the twelve Federal Reserve Districts suggest that national economic activity continued to expand in October and November. A number of Districts also noted that contacts remained optimistic about the outlook for future economic activity. Consumer spending continued to advance in most districts.”

Additionally, the report noted that inflation has generally been suppressed and stated:

“Employment gains were widespread across Districts, and Districts reporting on business spending generally noted some improvement.”

Words and expressions like “modest” and “moderate,” which are often used in the Beige Book, were taken out, showing how much the U.S. economy has grown.

This Beige Book diagnosis is important because it will serve as the baseline data for the Fed’s Federal Open Market Committee general meeting on Dec. 16-17 to discuss interest rates and monetary policy. I am keenly interested in how Fed Chairwoman Janet Yellen – who based continuing low interests rates on last month’s Beige Book analysis of “incremental growth” – will determine the direction of the monetary policy in relation to the duration of “considerable time.”* Vice Chair Stanley Fischer, one day earlier, diagnosed that it should be clear now to the Fed that the expression “considerable time” should now be removed.

It is likely that a decision to raise the U.S. interest rate will increase the financial volatility of the dollar-won exchange rate, as well as the outflow of capital in the nation. With the reduction in global liquidity, domestic investment and consumption will also be of concern.

The Korean government must reinforce the monitoring of foreign financial markets. The foundations for a contingency plan must be firmly maintained. Even more important is the strengthening of businesses and households in Korea. It will be difficult to persevere over foreign variables without instilling vitality to the businesses and households that are still struggling with over 1.2 quadrillion won – $1.07 trillion – in debt since the economic downturn in 2010. Due to the rising U.S. interest rates, our “golden time” is never long enough.

*Translator’s note: “Considerable time” was a buzzword that was used to describe how long the interest rates should be kept low. More information on this term is available here: http://www.businessweek.com/news/2014-12-02/fischer-says-fed-nearing-end-of-considerable-time-rate-pledge