[International Financial Briefing] FOMC "Will Raise Rates if Inflation Continues"… US Dollar and Interest Rates Rise in Tandem

The Federal Reserve’s January FOMC meeting minutes indicated that if inflation remains persistently above the target level (2% annual rate), the possibility of rate hikes should be maintained. Most committee members assessed that the downside risks to employment have eased, but risks to prices still exist. Some members warned that further easing amid high inflation could lead to market misunderstandings about the Fed’s commitment to price stability.

This was interpreted as a more cautious stance toward rate cuts in the short term. However, the CME FedWatch tool still reflects the possibility of two rate cuts this year (0.25 percentage points each in June and September).

US real economy indicators improve… AI investment effects become evident

In January, industrial production increased by 0.7% month-on-month, exceeding expectations (0.4%) and marking the largest increase in a year. Non-defense capital goods orders excluding aircraft also rose by 0.6%, better than expected, mainly driven by expanded AI-related investments.

Housing indicators also improved. In December, new housing starts and building permits both increased compared to the previous month.

On the other hand, Vice President Harris pointed out that Iran has not clearly responded to US core demands and mentioned the right to use military force, fueling geopolitical tensions.

Global currency and policy variables expand

In Europe, ECB member De Guindos hinted that if exchange rates impact prices, measures may be taken. There are also reports that President Lagarde may step down early.

UK January consumer price inflation slowed to 3.0%, reinforcing expectations of a rate cut in March. Japan’s second Kishida cabinet has been launched, expected to continue active fiscal policies and hawkish security stance.

Financial markets: US dollar strengthens and interest rates rise, stock gains narrow

Following the release of the January FOMC meeting minutes and easing AI-related concerns, US stocks rose. The S&P 500 increased by 0.56%, but gains narrowed after the minutes were published.

The US dollar index rose by 0.60%. The euro and yen fell by 0.61% and 0.97%, respectively.

The US 10-year Treasury yield increased by 2 basis points to 4.08%. The NY 1-month NDF was quoted at 1450.7 KRW (implying a swap rate of 1452.2 KRW), up 0.50%.

In commodities, WTI crude oil surged by 4.59%, with gold and copper prices also rising by about 2%.

Overseas perspective: “Dollar weakness overdone… rebound possible”

The Financial Times analysis pointed out that although the dollar’s weakness is expected to spread, considering its global status and the fact that some negative factors have already been priced in, the likelihood of a rebound is greater than further sharp declines.

Bloomberg warned that deteriorating financial conditions of software companies caused by AI could spread risks to the private lending market.

The minutes reaffirm that the Federal Reserve remains vigilant about inflation. While improvements in real economy indicators and expanded AI investments support an optimistic view of the economy, monetary policy uncertainties and geopolitical variables remain sources of volatility.