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Reduction of Quantitative Easing is Looming Large
Signals from Fed
Reduction of Quantitative Easing is Looming Large
  • By matthew
  • September 11, 2013, 06:20
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Ben Bernanke, chairman of the Federal Reserve.
Ben Bernanke, chairman of the Federal Reserve.


Financial market experts are paying keen attention with the reduction of quantitative easing (QE) around the corner. The won-dollar exchange rate plunged while the stock price index soared on September 9 in Korea, which is considered to be safer than other emerging economies. 

The Fed is expected to come up with specific measures for the discontinuation of QE at the regular FOMC meeting scheduled for September 17 and 18. Under the circumstances, market participants are focusing on forward guidance and how large the size will be. In fact, many of them have anticipated for a while that its QE would be stopped this month. The sensitive response is because the global financial market could take totally different shape depending on the announcement of the Fed. 

Discontinuation of QE Is a Done Deal

Recently, it has been announced that the US unemployment rate for August this year was 7.3%, the lowest ever since December 2008. Though the FOMC meeting is likely to result in a contractionary monetary policy, the size is forecast to be cut by approximately US$5 billion to between US$10 billion and US$15 billion a month. 

International experts are explaining that the reduction of QE has been a done deal in the market since the remarks made by Fed chairman Ben Bernanke in May. They have two scenarios now. One is that the Fed will gradually slow down the switch so that financial markets can pace themselves. However, the story is completely different if the policy is changed at a rapid pace. 

“In the case of the former, stock price indices can soar, while risky assets get less shock than expected, but the latter is likely to lead to an interest rate hike while affecting the stock market and real economy,” said a forex market insider, continuing, “The possibility of the Fed opting for the latter scenario is close to zero.”

Korea Is Considered Safe but Should Not Be Content

In the meantime, the Korean market is regarded as a relatively safe place thanks to its trade account surplus and record-high foreign exchange reserves. “Korea and Taiwan are benefiting from the recovery of the US economy led by its IT sector as of late,” the Bank of Korea commented, adding, “In particular, the slowdown of foreign fund inflow into Korea since the third QE, caused by the North Korea issues and Japan’s weak yen policy, has turned out to be favorable for it in retrospect.”

Capital flow is quite stable, too. According to the Financial Supervisory Service, foreign investors bought 1.524 trillion won (US$1.401 billion) net of Korean stocks in August alone. Although they posted a net sales of 2.06 trillion won (US$1.892 billion) in the bond market for the first time in seven months, the net purchase amount reached 1.6 trillion won (US$1.470 billion) if the 3.1 trillion won (US$2.846 billion) worth of currency control bonds coming to maturity are excluded. “Few hedge funds, which constitute a sort of channel for the inflow of hot money, are found on the capital flow side, but public funds and central banks are continuing with their investments,” said a market expert, adding, “There is no sign yet that the funds which have left emerging countries like India and Indonesia have veered to Korea.”

Korea is not a perfectly safe zone, though. “We can’t rule out the possibility of even greater market fluctuations following the differentiation,” said a high-ranking government official. He went on, “Anyway, we can’t completely avoid the hit, but what matters for us is to brace ourselves to provide against it.”

Bank of Korea Not Expected to Raise Benchmark Rate until H2, 2014 

With the reduction of QE on the horizon, all eyes are on the interest rate decision to be made by the Monetary Policy Committee (MPC) of the Bank of Korea. It is almost sure that the benchmark rate will be frozen at an MPC meeting scheduled for September 12, and an upward adjustment is not expected to be made until June next year. 

Therefore, the current key rate is likely to be maintained until March 2014, when the tenure of incumbent Bank of Korea governor Kim Choong-soo comes to an end. Other variables include the appointment of a new governor, which has to go through confirmation hearings, and the time taken for the new governor to get a grasp of his or her duties.