Fed tapering requires preparation for interest rate hikes and bubble collapse: The DONG-A ILBO


The Federal Reserve (Fed), the central bank of the United States, has said that tapering, which reduces liquidity provided to the market by buying bonds etc., will begin in November. As tapering naturally leads to higher interest rates, this means that the zero rate period will soon end in the country. This is sure to affect the future actions of the Bank of Korea, which preemptively raised the base rate in August.

“The slowdown in the pace of asset purchases may soon be justified if progress (in inflation and employment) continues broadly as expected,” the Fed said in a statement on Wednesday. Fed Chairman Jerome Powell also said the cut “could take place at the next meeting.” If tapering is decided at a Federal Open Market Committee (FOMC) meeting in early November and continues the following year, an interest rate hike may begin in the second half of next year. The tapering is not necessarily negative as it signals that the US economy is recovering from the shock of COVID-19. What is problematic, however, is that money can quickly flow out of the financial markets of emerging countries, which present a higher risk. A similar situation occurred in 2013 when a high level of liquidity resulting from the global financial crisis was reduced.

South Korea’s Economy and Finance Ministry said the Fed’s move would have limited impact on the domestic financial market, but warned volatility could increase. The risk factors that could affect the South Korean economy with the end of the low interest period are 222 trillion won in debt from small business owners, whose principal and interest payments have been delayed. since the COVID-19 outbreak and more than 1.8 trillion won. of household debt. If the Bank of Korea further increases the interest rate to prevent the outflow of foreign funds, the interest burden on households and business owners will increase sharply.

The upward trend in mortgage lending and deposit lending triggered by soaring house and deposit prices continues despite aggressive actions by financial authorities to curtail lending. The debt burden on vulnerable groups continues to increase, as seen in the case of people in their twenties whose household debt is growing more than twice as fast as other age groups due to the rapid increase in deposits and monthly rents as well as financial difficulties. In addition, even stronger measures to reduce debt will be introduced next month. Regulations on margin lending, in which an investor borrows against the value of securities held with non-bank financial institutions and securities firms, will be tightened.

Once the United States accelerates its restrictive fiscal policy, an asset price bubble, including stocks, cryptocurrency and real estate, can collapse faster than expected around the world. Households and businesses must prepare for the period of high interest rates by refraining from unnecessary loans and irresponsible investments.


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