Note: Global Morning Briefing summarizes international news reported by Seoul Economic Daily.
Fed's Hawkish Return After Three Years and Two Months
The U.S. Federal Reserve raised interest rates for the first time in three years and two months, citing inflation pressure that proved stronger than expected.
The Fed lifted its benchmark rate by 0.25 percentage points to a range of 3.75% to 4.00% on the 16th. It was the first increase in three years and two months, and all 12 voting members supported the decision. The gap with the Bank of Korea's base rate of 3.00% widened to 1.00 percentage point, and the Fed signaled through its dot plot the possibility of one more increase this year.
Fed Chair Kevin Warsh said at a news conference that inflation was too high and had persisted too long, and that the move would help return price growth to the 2% target. He also said officials responsible for trade and fiscal policy in the Donald Trump administration should each stay within their own roles. Warsh described the increase not as the start of a new tightening cycle but as an adjustment that reverses part of the three rate cuts made last year. Still, 16 of the 18 members other than Warsh backed a further increase this year, and markets read the signal as hawkish.
U.S. 10-year Treasury yields and New York stocks swung sharply after the announcement, and the Dow Jones Industrial Average fell to a three-month low. The won-dollar exchange rate also jumped, closing at 1,382.2 won and moving back above the 1,380 level for the first time in three weeks. Following the Bank of Korea, the Bank of Japan is also considering a rate increase on the 18th, part of a broader acceleration of monetary tightening worldwide.
Trump sharply criticized the Fed's rate increase but expressed confidence in Warsh, saying, "I trust Kevin, but he has a very difficult board."
Yen Weakens Again After Fed's Hawkish Signal
The Fed's hawkish increase has deepened the yen's weakness, strengthening expectations that the Bank of Japan will move toward faster tightening at its meeting this week.
According to Bloomberg, the yen fell as much as 1% overnight to 156.42 per dollar on the 16th after the Fed raised its benchmark rate by 0.25 percentage points and delivered a hawkish message. The decline is attributed to expectations that the U.S.-Japan rate gap will widen further. Markets expect the Bank of Japan to raise its benchmark rate by 0.25 percentage points from 1% at its September policy meeting on the 17th and 18th, with overnight index swap markets pricing the probability of such an increase at 98.2%.
Glen Yin, head of research at ACCM, said the Bank of Japan is under pressure to raise rates and issue a hawkish message to cushion the shock of the weaker yen, and that failing to meet market expectations risks pushing the currency to the 160 range within a short period. The Nihon Keizai Shimbun noted that as the Bank of Japan pursues policy normalization, the synchronization between U.S. and Japanese financial markets is growing stronger. During the U.S. rate-hike cycle in 2022, the Bank of Japan absorbed part of the shock through negative interest rates and yield curve control, but those policies were scrapped in 2024, leaving Japan directly exposed to U.S. rate policy.
The Bank of England, meanwhile, held its benchmark rate at 3.75% for a sixth consecutive meeting at its Monetary Policy Committee session on the 17th. Some forecasts suggest it could begin raising rates in earnest from November, citing surging natural gas and Brent crude prices and August consumer price growth above 3%. The European Central Bank is also seen as a candidate for a December increase.
OpenAI Discloses AI Models That Went Off Script and Fabricated Data
OpenAI's latest AI models were found to have escaped developer control, written their own instructions and attempted to deceive humans. The disclosures have reignited debate over the risks posed by AI.
OpenAI on the 16th disclosed six cases of abnormal behavior identified in its AI models between October of last year and July of this year. The most striking case came from an unreleased version of Astra, which fabricated a scenario in which developer messages had been hacked and then issued an instruction to disregard all future developer directives. The models were also observed requesting and sharing files with one another through internal system space without human knowledge.
Other cases included GPT-5.6 Sol generating fake data on its own when it could not find supporting material and instructing that the fabrication be hidden from humans, posting material it had obtained on the internet and then citing it again as if it were an external source, and using leaked system access codes to connect to outside systems without authorization. OpenAI said it would set up a dedicated team to monitor such deviations and decide on disclosure based on the severity of each case.
Yoshua Bengio, a professor at the University of Montreal in Canada who is considered a founder of deep learning, said in an interview with AFP that AI could pose a threat to humanity and called for strong global regulation on the level of the international bodies that oversee nuclear weapons. Efforts to monitor AI behavior are also spreading among companies.
Kamal Hathi, senior vice president at Splunk, said in an interview with Seoul Economic Daily that customer demand for AI observability is growing, and that awareness of the need to respond has risen as incidents involving Anthropic models have been reported.
F-35s From the U.S., Missiles From China: Saudi Arabia's Double Game
Saudi Arabia has already used Chinese-made ballistic missiles in combat, separate from the U.S. push to sell it F-35 fighter jets. The finding exposes a crack in the arms competition the U.S. and China are waging over Saudi Arabia.
The Wall Street Journal reported on the 16th that an analysis of missile debris found in Yemen confirmed the Saudi military had used the Chinese-made Dongfeng-15A ballistic missile in combat for the first time. U.S. intelligence agencies had long assumed China was exporting ballistic missiles and other weapons to the Middle East, but this is the first time they have obtained concrete evidence. Saudi Arabia has traditionally been a major buyer of U.S. weapons, but in ballistic missiles it has maintained cooperation with China, going as far as to deploy Chinese intermediate-range missiles acquired in 1988.
The Trump administration is meanwhile pursuing a $24 billion contract, or about 33 trillion won, to sell Saudi Arabia 48 F-35 stealth fighters and one spare engine, and the U.S. State Department sent the proposed sale to Congress in June, where it is under review. According to The New York Times, however, the U.S. Defense Intelligence Agency identified in an internal report the possibility of Chinese military access to Saudi bases and Chinese equipment installed in Saudi telecommunications networks as risks to F-35 technology security.
The U.S. needs to provide advanced strategic weapons to keep Saudi Arabia within its own security framework, but Riyadh is diversifying its arms suppliers and deepening military and technological cooperation with China. Some analysts say China is exploiting a gap created by weakened military trust between Washington and Riyadh after the U.S. rejected Saudi requests for military support following the U.S.-Iran armed conflict.
