The likelihood that the U.S. Federal Reserve will raise interest rates for the first time in more than three years is rising, and the 10-year Treasury yield briefly climbed above the psychological threshold of 5%. Fears of renewed U.S. tightening have cast a shadow over South Korea's stock market.
Futures markets priced a 92% chance that the Fed will raise its benchmark rate by 0.25 percentage point at the Federal Open Market Committee meeting on Sept. 15-16, according to CME Group's FedWatch tool on the 14th.
That is sharply higher than roughly 70% before the latest inflation data were released. The probability that the benchmark rate will be above its current level by December stood at 98.7%. A 0.25 percentage point increase at this meeting would lift the target range to 3.75%-4.00% from the current 3.50%-3.75%.
Such a move would be the first rate increase in three years and two months, since July 2023. It would mark a shift back to tightening after three consecutive rate cuts in the second half of last year and a subsequent hold.
Treasury yields also jumped as the prospect of further Fed tightening came into focus. The 10-year yield rose as high as 5.012% during the session, exceeding 5% for the first time since October 2023.
Market expectations swung sharply toward tightening because recent inflation data came in stronger than expected and international oil prices moved well above $100 a barrel in the wake of armed conflict in the Middle East, deepening concerns about a resurgence of inflation. The U.S. consumer price index for August, watched as the last inflation reading before this FOMC meeting, also remained elevated. The August CPI rose 3.4% from a year earlier, while core CPI, which excludes energy and food, gained 2.4%.
Against that backdrop, analysts expect the KOSPI to extend its decline. A sharp drop in U.S. technology shares is reinforcing that view. The KOSPI closed the previous session at 6,684.37, down 3.26%, its third straight session of losses.
