Korean Stocks Tumble as Fed Raises Interest Rates


The Federal Reserve is expected to raise interest rates by 25 basis points at a 2 p.m. meeting Wednesday, after data showed consumer prices in the United States rose last month at the fastest pace in six years. But attention will be focused mainly on any hints that the Fed might accelerate its rate hikes in the coming months.

To be sure, the Fed is not inclined to hike rates any more than gradually after years of mostly over-optimistic predictions for inflation and economic growth, and disappointing wage gains of around 2.5 percent annually. Others believe the central bank will stick with its projection of three rate increases, partly out of concern that rising trade tensions triggered by President Donald Trump's aggressive policies might slow global growth.

Wednesday's statement and projections will also be followed by a press conference with Fed Chair Jerome Powell, which is set to begin at 2:30 p.m. ET.

Since the Fed last met in early May, most economic indicators have signaled steady strength. After six years of undershooting its 2 percent target for annual inflation, the Fed's preferred inflation gauge attained that level during March and April, the government reported.

"The Fed deserves tremendous credit for steering the economy to calmer waters, supporting what is likely to be the longest expansion in US history while meeting inflation and employment objectives", said Stephen Gallagher, chief USA economist at Societe Generale. Consumer and business spending is powering the economy, in part a result of the tax cut President Donald Trump pushed through Congress late previous year. The nation's unemployment rate is at an 18-year low of 3.8 percent. Not since 1969 has the jobless rate been lower.

The nightmares that long haunted both hawks and doves have not come to pass, even as the Fed held interest rates near zero for years and snapped up some $3.5 trillion in bonds in an extraordinary effort to boost the recovery. In March, the officials collectively projected a total of three rate hikes in 2018, matching the number in 2017, after one rate increase in 2015 and one in 2016. The U.S. central bank is expected to hike its key interest rate another quarter of a percentage point Wednesday.

The Fed aims to achieve its mandates of maximizing employment and stabilizing prices by lowering rates to spur growth during times of economic weakness and raising rates to slow growth if the economy threatens to overheat. Prices did not spike in response to the vast monetary stimulus, nor has the job market cooled since 2015 when the Fed began tightening policy. But if it miscalculates and overdoes the credit tightening, it can trigger a recession.

The current economic expansion is the second-longest in US history, and will set a record if it lasts a bit more than a year longer.

China and the other nations have pledged to retaliate with their own tariffs on US exports to their countries, thereby risking a tit-for-tat trade war that could dim prospects for the USA and global economies.

Powell will also likely face questions about whether the Fed's policymakers might allow inflation to rise for a time above their 2 percent target and how comfortable they are to see the unemployment rate falling so far below the 4.5 percent level that the central bank has declared as its current estimate of the natural rate for long-term unemployment.