Fed holds rates steady amid 'uncertainty'; what that means for S. Korea's future rate decisions

The U.S. Federal Reserve has decided to leave its lending rate unchanged amid uncertainty over the broader impact of the Trump administration's tariffs.

Our correspondent Lee Soo-jin covers the Fed's latest decision and its broader implications.

In its third monetary policy meeting of the year, the U.S. Fed has decided to continue its "wait-and-see" stance by keeping rates steady.

The decision to keep the current key borrowing rate range of 4-point-2-5 percent to 4-point-5 percent on Wednesday extends a pause in the Federal Open Market Committee's rate-cutting cycle that began in January.

"The risks of higher unemployment and higher inflation appear to have risen, and we believe that the current stance of monetary policy leaves us well-positioned to respond in a timely way to potential economic developments."

And these risks to employment and inflation the two pillars of the Fed's dual mandate stem from the uncertainty surrounding President Trump's tariffs.

The decision to hold rates steady was thus unanimous, despite weeks of pressure from Trump to lower them.

"The latest in consumer inflation report saw a 2-point-4 percent year-over-year rise in March. The one year outlook compiled by the University of Michigan stand at 6-point-5 percent. The main driver of the jump in inflation expectation is President Trump's tariff policies."

The rate freeze leaves the key interest rate gap between South Korea and the United States at 1-point-7-5 percentage points based on the upper end of each country's rates.

And the rate gap puts the BOK in a tough position ahead of its own meeting later this month, as an even larger gap could lead to capital outflows that push the won down further raising import costs and adding to inflation.

But Korea's central bank is likely to lower interest rates due to the sluggish domestic economy.

"While the exchange rate is now in the upper 1,300-won range, domestic factors are becoming more important for rate cuts. Ideally, the Fed would cut rates too, but given Korea's tough domestic situation, many expect the Bank of Korea to cut rates in May."

Data released by the central bank last month showed that the country's real gross domestic product, a key indicator of the economy, shrank by 0-point-2 percent on-quarter in the first quarter.

In response to the Fed leaving rates unchanged, Acting Finance Minister Kim Beom-seok said that the government will hold weekly macroeconomic and financial meetings to monitor markets and ensure economic stability.

Lee Soo-jin, Arirang News.