The U.S. Federal Reserve is likely to raise its benchmark rate again before year-end after lifting it for the first time in three years, according to a brokerage report. For Korean stocks, the report said, the bigger issue is not the rise in U.S. rates itself but the rise in the won-dollar exchange rate on a stronger dollar and the resulting shift in foreign investor flows.
"At the September Federal Open Market Committee meeting, the Fed resumed rate increases for the first time in three years and signaled the possibility of further hikes," Byun Jun-ho, an analyst at IBK Investment & Securities, said in a report on the 17th. "We believe this reflects renewed concern over inflation as oil prices have surged on the resurfacing of Middle East risk."
The Fed raised its benchmark rate by 0.25 percentage point to 3.75-4.00% on the 16th. In the dot plot showing projections for the rate at the end of 2026, 16 of the 18 policymakers expected a higher rate than the current level. Of those, 12 projected 4.00-4.25% and four projected 4.25-4.50%, leaving open the possibility of at least one more increase this year.
"With only two dots calling for a hold, the chance of another hike this year is very high," Byun said. "For next year, however, the projections are widely dispersed, so the direction will likely depend on whether Middle East risk escalates or eases."
He put more weight on December than October for the next move. "The outlook for growth and inflation has not changed dramatically from the June FOMC, so the case for back-to-back hikes is somewhat weaker," he said. "It is also unlikely the Fed would attempt an aggressive policy shift ahead of the November midterm elections."
The report said the increase should not be read as tightening accompanied by a deteriorating economy. The Fed raised its U.S. gross domestic product growth forecast for this year to 2.3% from 2.2% and for next year to 2.4% from 2.3%, each by 0.1 percentage point. It lowered its unemployment rate projections for both this year and next to 4.1% from 4.3%, a cut of 0.2 percentage point.
"On the surface this is not a rate increase accompanied by growth concerns, so there is little room to read it as a sign of a worsening economy," Byun said. "Still, with U.S. inflation picking up again and rates staying high, market volatility is increasing, so caution toward optimism will persist."
For the Korean market, he said the currency deserves closer attention than rates. With Korea's monetary policy expected to stay on hold for some time while the Fed may raise rates further, the widening gap between Korean and U.S. rates could add to upward pressure on the dollar.
"The won-dollar exchange rate had fallen sharply recently (the won had strengthened), so it could be highly sensitive to a rebound following the FOMC outcome," Byun said. "Investors need to keep a close watch on the resulting increase in selling pressure from foreign investors." He added that "foreign selling appears to have resumed since the 10th, when the exchange rate hit a short-term low."
