This week is a “super week” for major central banks making interest rate decisions, with the main focus on the United States. The U.S., having a significant impact on the global economy, is expected to initiate its first interest rate cut of the year, the first effectively since the inauguration of President Donald Trump.
According to Bloomberg on the 14th (local time), the central banks of 14 countries, including developed nations like the U.S., Japan, the U.K., and Canada, will decide their benchmark interest rates this week. Both domestic and foreign investors are eyeing the Federal Open Market Committee (FOMC) meeting scheduled for the 16th-17th (Korean time 18th). While many central banks are likely to choose “holding” interest rates due to the impact of U.S. tariff policies and inflation concerns, the U.S. is expected to proceed with a rate cut according to market predictions.
The Chicago Mercantile Exchange (CME) FedWatch suggests there is a 93.4% probability that the Fed will execute a 0.25% rate cut this month as of 4:30 p.m. Korean time on the 14th. Moreover, the likelihood of a 0.5% “big cut” was higher at 6.5% compared to a zero chance of maintaining the current rate.
There is a reason the market is confident that the Fed will shift its policy trajectory with a rate cut this month, mainly due to the “employment shock” for two consecutive months. Despite pressure from Trump to cut rates, the Fed maintained the benchmark rate at 4.25% to 4.5% at five FOMC meetings this year.
According to the U.S. Department of Labor, new non-farm employment last month was 22,000, only 30% of the market expectation of 75,000. In the previous month, the employment increase for July was significantly below the market forecast of 104,000, recording just 73,000.
As employment indicators worsen, forecasts suggest the pace of rate cuts could accelerate. A Bloomberg survey of 42 economists reveals that 40% of respondents expect three rate cuts within the year. Observations indicate the Fed may proceed with cuts not only this month but also at the FOMC meetings in October and December. Morgan Stanley presented a more aggressive forecast, predicting that the Fed will continuously lower rates by 0.25% for four consecutive meetings from this month until January next year. The upper end of the U.S. benchmark interest rate is forecasted to decrease by 1% to 3.5%.
U.S. monetary policy also impacts the Korean economy. If the Fed cuts the benchmark interest rate by 0.25% this month, the rate gap between Korea (2.5%) and the U.S. would shrink from a record 2% to 1.75%. With a reduced burden of foreign capital outflow, the Bank of Korea gains more leeway to stimulate the economy. Park Sang-hyun, an economist at iM Securities, stated, “A reduced Korea-U.S. interest rate gap could lead to an influx of foreign capital into the domestic market due to the weaker dollar, raising the value of the Korean won and positively influencing the domestic stock market.” The KOSPI has already hit an all-time high driven by foreign buying. According to the Korea Exchange, foreign investors made a net purchase of KOSPI stocks worth 4.679 trillion won from the start of the month to the 12th.
However, not everyone views the U.S.’s signal of the first rate cut of the year positively. DB Securities researcher Kang Hyun-gi commented, “The need for a rate cut in the U.S. arises from a series of disappointing announcements regarding the U.S. job market,” and analyzed, “This rate cut is more of a ‘recession cut,’ with the Fed responding to economic downturns through rate cuts.” Daniel Hornung, a researcher at the Stanford Economic Policy Research Institute, also warned of stagflation (economic stagnation with rising prices), stating, “Inflation is rising moderately while labor indicators are distinctly worsening.”
Furthermore, the central bank of Canada will decide on its benchmark interest rate on the 17th, the U.K. on the 18th, and Japan on the 19th. Many countries may opt to hold interest rates due to tariff impacts and inflation concerns, unlike the U.S. Political uncertainties, including the impact of U.S. tariff policy and Japanese Prime Minister Shigeru Ishiba’s declaration of intent to resign, are overlapping, raising expectations for the Bank of Japan (BOJ) to freeze rates. If the BOJ maintains rates this time, it would be the fifth consecutive hold since raising the benchmark rate this January.
Although most major countries besides the U.S. are in a “wait-and-see” stance by keeping rates steady, market instability persists. Fiscal soundness concerns centered around Europe are a prime example. On the 12th (local time), Fitch Ratings downgraded France’s national credit rating from “AA-” to “A+.” France’s fiscal deficit was 5.8% of GDP last year, significantly exceeding the eurozone average of about 3.1%, and the downgrade was exacerbated by political turmoil. However, Baek Seok-hyun, an economist at Shinhan Bank, analyzed, “France’s situation of political turmoil due to intractable fiscal problems is not new, so the market impact is limited.”