Fed Up With Jerome Powell? South Korea Is Getting There

Just about everything Governor Rhee Chang-yong and his team at the Bank of Korea thought they knew about 2024 is being turned upside down.

China isn’t rebounding the way many economists expected. The Federal Reserve isn’t going to cut interest rates five times. Japan isn’t exiting quantitative easing, a realization that has the yen disappearing in real time. The dollar’s biggest rally since the early 1990s is defying financial gravity despite the U.S. national debt approaching $35 trillion.

Few economies are more on the frontlines of these crosscurrents than South Korea. Its open and sizable economy is also caught directly in the middle of economic tensions between Beijing, Tokyo and Washington. How Rhee’s team and President Yoon Suk Yeol’s administration balance trade ties with China, fallout from a plunging yen and Seoul’s vital security alliance with the U.S. will be quite the case study in multi-tasking.

This week, Rhee admitted that the BOK is now reconsidering the timing of rate cuts that economists had expected. The reason: a weaker won than traders had anticipated and a firmer-than-expected Korean economy. Again, trends that Rhee’s team probably didn’t see coming back on January 1.

Speaking at an Asia Development Bank conference in Tbilisi, Georgia, Rhee explained that “whether the rate cut timing will be pushed back, how much it will be pushed if it is, or if it will even come will be the question that needs to be reviewed. I wouldn’t call it starting from scratch. But the situation has changed since April.”

Much of the confusion stems from the wildly mixed signals emanating from the globe’s most powerful monetary authority — the Fed in Washington. There, Chairman Jerome Powell knows as much about what his team will do next as any of us. One day, traders are convinced the Fed’s next move will be slash rates. The next, the Lawrence Summers take that the Fed’s next act will be to tighten sounds more and more plausible.

As the former U.S. Treasury secretary sees it, hopes that inflation will soon drop to 2% from 3% are proving increasingly fanciful. Summers worries that a rate cut in the months ahead would just toss more monetary fuel on the fire, meaning easier policy would only backfire.

Here, Powell’s take is hard to discern. This week, Powell offered something for both sides — the hawks and the doves. The former crowd heard him explain that while inflation has cooled over the past year, it remains higher than hoped. As the Fed’s statement said: “In recent months, there has been a lack of further progress toward the committee's 2% objective.” Later, Powell added that “we remain highly attentive to inflation risks.”

The inflation doves got their due from Powell when he raised the specter of the supply-side distortions from the pandemic era “unwinding” in virtuous ways. In other words, who really knows where short-term rates are headed?

Certainly not Rhee and his fellow policymakers. In recent comments, Rhee has cited the about-face at Fed headquarters in Washington, and the dollar’s resulting surge, as complicating factors in Seoul.

The won isn’t plunging as fast as the Japanese yen — it’s down 4.5% so far this year versus the yen’s 7.8% drop. But strong dollar rallies don’t tend to go well for Asia. And more than a quarter century after the 1997-1998 Asian financial crisis, the region is grappling with challenges that echo that era.

One is fear of huge capital outflows as more liquidity rushes toward dollar assets. Another: that Korea might import increased inflation thanks to a weak exchange rate.

As Middle East tensions intensify, Russia pushes on with its Ukraine invasion, OPEC cuts oil production and the U.S.-China trade war heats up, global prices are far more likely to rise than fall in the months ahead. A weaker won will only heighten the risks Korea will import inflation.

The high odds that the dollar’s rally will continue complicate Rhee’s year. As the magnetic force around the globe’s reserve currency strengthens, officials in Korea, China, Japan and Southeast Asian economies will have their work cut out for them in keeping currencies aloft.

It’s not all bad for Korea, of course. For all the worries about downward pressure on the won, Korea’s exports are experiencing a healthy boost. The value of overseas shipments jumped 11.1% from a year earlier in the first 20 days of April.

But with the Fed prolonging the “higher for longer” era for U.S. yields, Rhee’s job is becoming more and more challenging by the day. The same goes for peers through the region who could be excused for being equally fed up with the mixed signals coming from Washington.