Fed Holds Rates as Powell Warns of Unknown War Impact

The U.S. Federal Reserve held its benchmark interest rate steady at 3.50-3.75% on the 18th, marking the second consecutive pause following January's decision. The move appears driven by persistent inflationary pressures. Fed Chair Jerome Powell stated at a press conference that "rate cuts will be difficult without clear progress on inflation," even raising the possibility of further hikes. His admission that "no one knows what impact it will have" regarding the Middle East conflict's ripple effects speaks volumes about the severity of the current crisis.

Signs of a market chill amid zero visibility are emerging everywhere. Within the Fed, pessimism that "there will be no rate cuts this year" has surged from 5% to 52% in just two months. The U.S. Personal Consumption Expenditures price index recorded 3.1%, exceeding the 2% target, while the Producer Price Index jumped more than double expectations. Non-farm payrolls also plunged by the largest margin since late 2020. Warnings of stagflation—where prices soar while the economy sinks—have grown louder.

The biggest factor fueling the Fed's hawkish stance is the ever-expanding Middle East risk. Following news of Israel's bombing of Iranian gas fields, Dubai crude surged past $136 per barrel, while Brent crude jumped 8% to above $110. High oil prices raise production costs, stoking inflation, which in turn blocks rate cuts—creating a vicious cycle. As the Korea Institute for Industrial Economics and Trade warned, if a blockade of the Strait of Hormuz continues for more than three months, domestic manufacturing production costs could rise by up to 11.8%. This would deal a fatal blow to our export-dependent economy.

The Bank of Korea's dilemma has deepened. Amid the triple threat of high oil prices, a weak won, and elevated inflation, it may need to consider rate hikes rather than cuts. The central bank could fall deeper into a policy trap where stimulating growth fuels inflation, while fighting inflation risks economic contraction. The government is rapidly rolling out emergency measures including oil price caps and a supplementary war budget. However, the current situation must not be dismissed as a temporary variable. Authorities must prepare thoroughly for worst-case scenarios of a prolonged Middle East conflict, including controlling price and exchange rate volatility and diversifying energy supply chains. All capabilities must be focused on ensuring our economy's fundamentals can withstand any uncertainty.