Preparation needed for US Fed’s tapering of quantitative easing

The U.S. Federal Reserve has decided to slow down its stimulus for the U.S. economy. The Fed has announced that it will reduce its purchases of Treasury bonds and mortgage bonds from January by 10 billion dollars from 85 billion dollars to 75 billion dollars a month. Although Europe and Japan expressed that they would “continue quantitative easing,” they are also expected to taper as watching the conditions of their economy and the global economy.

Since the onset of the global economic crisis in 2008, the Fed has injected over 3 trillion dollars (3.160 quadrillion won) into the market. Quantitative easing (QE) meaning to supply funds to the market regardless of interest rates in order to stimulate the economy is an exceptional and abnormal policy, and cannot be implemented continuously. Therefore, the market has also projected that there would be an exit from the QE program, and the 10 billion dollar reduction is also at the expected level.

The Fed’s reduction of quantitative easing can be interpreted that “the confidence of the U.S. government and its central bank on the recovery of U.S. economy has been solidified.” This must be good news not only for the global economy but also for the Korean economy, which is highly dependent on exports. The United States has raised its GDP forecast for both this year and next year. Upon the Fed’s announcement on tapering, the dollar is being boosted and the U.S. stock market is on the rapid rise because “uncertainties have been eliminated.”

However, there will be some effect in a short term. If the U.S. starts reducing the supply of funds, the capital market in emerging nations will dry up and their stock and foreign exchange markets will also shrink accordingly. If emerging nations choose to raise interest rates to prevent the outflow of funds, their economy may be affected. Rising interests can also have an impact on highly-indebted businesses and households. Even when the Fed only mentioned possible tapering of economic stimulus in May, the economy of India, Indonesia, Turkey, Thailand and Brazil, considerably fluctuated. The bigger-than-expected effect of tapering may slow down exports of emerging nations.

Fortunately, Korea is in a better situation than most emerging nations. Going through the Asian financial crisis and the global financial crisis, Korea’s economic participants such as financial institutions and businesses now have stronger fundamentals. Korea’s foreign exchange reserve amounts to 345 billion dollars and its current account surplus is the largest ever. Although over-optimism should be avoided, there is no reason to be pessimistic. The Korean government should develop measures based on possible scenarios and closely watch the financial and foreign exchange markets to aptly respond to market anxieties. Businesses and households should also keep in mind the fact that the current low-interest policy may not continue for long.