Fed Maintains Benchmark Rate at 3.50-3.75%

The U.S. Federal Reserve kept its benchmark interest rate unchanged at 3.50-3.75% at its Federal Open Market Committee (FOMC) regular meeting on March 18 (local time). This marks the second consecutive freeze following January's hold. The Fed had cut rates three consecutive times from September to December last year before shifting to a pause this year.

Of the 19 FOMC members, only Governor Steven Miran advocated for a 0.25 percentage point cut, while the remaining members agreed to maintain the current level.

Rate Cut Outlook Weakens Amid Inflation Concerns

The Fed's decision to hold rates stems from rising oil prices due to Middle East conflicts and mounting inflationary pressures. Fed Chair Jerome Powell expressed concern at a press conference, stating, "Over the past five years, we've faced the COVID-19 pandemic and tariff shocks, and now we're confronting an energy shock of unknown magnitude and duration. This situation could create problems for inflation expectations."

The Fed raised its forecast for this year's Personal Consumption Expenditures (PCE) inflation in its Summary of Economic Projections (SEP) from 2.5% to 2.7%. However, the median projection for the year-end benchmark rate in the dot plot (FOMC members' future rate forecasts) remained at 3.4%, unchanged from December's forecast. This suggests the possibility of one rate cut (0.25 percentage points) within the year.

Notably, Chair Powell revealed that the April meeting discussed the possibility of a rate hike. This is interpreted as a signal that if inflationary pressures persist, the Fed may consider raising rates rather than cutting them.

BOK Also Expected to Freeze for Seventh Consecutive Time

With the Fed's rate hold, the gap between U.S. and South Korean benchmark rates remains at 1.25 percentage points based on the upper bound. The Bank of Korea (BOK) is now more likely to keep its benchmark rate at 2.50% for a seventh consecutive time at its Monetary Policy Board meeting on April 10.

There are three main reasons the BOK must maintain its rate freeze. First, surging oil prices due to the Iran crisis are directly impacting domestic inflation. According to the BOK, the import price index (won basis) for February rose to 145.39, up 1.1% from the previous month (143.74). This marks eight consecutive months of increases. Import prices for energy items such as crude oil (9.8%), naphtha (4.7%), and jet fuel (10.8%) rose significantly.

Second, housing price instability persists. In its Monetary and Credit Policy Report, the BOK stated, "While the pace of housing price increases has slowed somewhat, uncertainties remain as the upward trend spreads to non-metropolitan areas."

Third, if the BOK cuts rates, the widening U.S.-Korea rate gap could further weaken the won-dollar exchange rate, which already exceeds 1,500 won.

Middle East Risks Complicate Monetary Policy

MPC member Hwang Keon-il recently stated, "In March, rapid changes in the external environment due to Middle East regional conflicts increased uncertainty in the forecast path, and volatility in financial and foreign exchange markets expanded significantly. It would be advisable for monetary policy to maintain a cautious neutral stance for the time being."

According to the dot plot of seven members disclosed at the February MPC meeting, projections for the benchmark rate six months ahead concentrated on maintaining 2.50%. Of 21 total forecasts, 16 expected the current level to hold, four anticipated a cut to 2.25%, and one predicted a hike to 2.75%.

Future Outlook [AI Analysis]

If the Middle East crisis becomes prolonged, the Bank of Korea's monetary policy challenges will likely intensify. This is because concerns about stagflation—simultaneous rising inflation and economic slowdown—could materialize.

If inflationary pressures are strong enough for the Fed to discuss a rate hike at its April meeting, the BOK's rate cut timing may be further delayed. The possibility of a first-half rate cut, which markets had initially anticipated, appears to have virtually disappeared.

However, weak U.S. employment data for February remains a variable. If signs of economic slowdown become clear, the Fed may proceed with rate cuts in the second half. The BOK is also expected to continue its cautious approach while closely monitoring U.S. monetary policy direction.