Kevin Warsh, the new Chair of the U.S. Federal Reserve, made a hawkish statement during his first speech at Jackson Hole. He noted, "While the personal consumption expenditures (PCE) price index and the consumer price index (CPI) have performed better than expected this summer, we cannot conclude that the underlying trend has significantly improved." He added, "From the perspective of our responsibility for price stability, the relevant indicators are increasingly concerning."
Markets interpreted this as a signal for a September interest rate hike. According to the Chicago Mercantile Exchange's FedWatch, the futures market for the federal funds rate (FFR) reflects a 57.5% probability that the current benchmark rate of 3.50–3.75% will increase by 0.25 percentage points to 3.75–4.00% at the September FOMC meeting. Despite pressure from President Donald Trump for rate cuts, Warsh has prioritized price stability, indicating a strong possibility of entering a rate hike phase, independent of the political tensions surrounding the midterm elections.
This poses a burden for the South Korean economy. If the U.S. raises rates again, the interest rate gap between South Korea and the U.S. will widen, increasing the pressure for foreign capital outflows and a weaker won. The Bank of Korea will find it increasingly difficult to ignore the pressure to raise rates to stabilize prices and exchange rates. However, the domestic situation is the opposite of that in the U.S. Household debt is nearing the highest level in the world relative to gross domestic product (GDP), and even a slight continuation of high interest rates could erode household consumption capacity due to increased interest burdens.
Domestic consumption has struggled to recover due to cumulative fatigue from high interest rates and inflation over the past few years. The delinquency rates for self-employed individuals and vulnerable borrowers remain high, and additional interest burdens could push these groups into critical situations first. If the Bank of Korea raises rates, it could exacerbate the already weakened domestic demand, creating a dilemma.
The solution lies in a sophisticated policy mix that prevents financial instability while not being swayed by external factors. The Bank of Korea should avoid mechanically responding to the pace of U.S. rate hikes and instead closely monitor exchange rates and capital flow trends to maintain as much independent judgment as possible.
It is essential to clarify priorities among price stability, growth, and financial stability, and communication with the market should be consistent and principled to build trust. Addressing household debt requires a focus on managing the debt service ratio (DSR) and improving loan structures rather than relying solely on interest rates to mitigate risks.
The government should not place the burden solely on monetary policy but also play a role in cushioning the interest burdens of vulnerable groups and small businesses through fiscal policy. It is necessary to reassess external safety nets such as foreign exchange reserves and currency swaps and prepare contingency plans for capital flow volatility.
What is most needed now is proactive response. Delaying action until after the U.S. tightening signals are confirmed will only narrow policy options and increase associated costs. With limited time before the September FOMC, the government and the Bank of Korea must begin to concretely review response plans for various scenarios.
While external variables are beyond our control, the extent to which we can absorb their impact depends on the preparedness of domestic policies. Proactive measures are essential to avoid the worst-case scenario, where external shocks translate into vulnerabilities in household debt and domestic demand.
* This article has been translated by AI.
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