The Seoul stock market enjoyed a strong rally Wednesday, driven by the U.S. Federal Reserve's aggressive half-point interest rate cut. Investors felt the powerful effect of the Fed's move on the financial markets not only in the United States but also around the world. The benchmark KOSPI index surged 64.04 points or 3.48 percent to 1,902.65. The local market regained the 1,900 level following a sharp gain on the New York Stock Exchange.
Market players had expected the American central bank to reduce the federal funds rate by 0.25 percentage points. However, Fed Chairman Ben Bernanke seemed to try to take Wall Street and the global markets by surprise by cutting the interest rate by 0.5 percentage points Tuesday. The Fed also decreased its discount rate, the interest it charges on its direct loans to banks, by the same amount.
The rate cut is designed to avoid the risk of an economic recession amid a housing slump and financial market turmoil stemming from the subprime mortgage problems. ``Today's action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruption in financial markets and to promote moderate growth over time,'' the Fed said.
Analysts believe the Fed has taken bold action to minimize the risky effects of the spreading financial market turbulence on the economy by lowering the rate for the first time in four years. Some of them predict the Fed might come up with further rate cuts as inflation pressure has been easing. The Fed said it ``will act as needed to foster price stability and substantial economic growth.'' The remarks appear to reflect Bernanke's willingness to take further action if necessary.
However, it remains to be seen whether Bernanke will produce successful results in his first major test since he took over from Alan Greenspan in February 2006. He still faces mounting challenges from the subprime crisis and the financial turmoil, which might rage again through the U.S and global markets sooner or later. There are still worries about a vicious circle of rising mortgage defaults, a steeper housing slump, worsening consumer sentiment and a slowdown in economic growth.
The Fed chairman may face criticism that he has yielded to pressure from the markets to protect investors who have recklessly invested in subprime mortgage-backed assets. Some critics raised the question of moral degradation of the central bank whose prime goal is to ensure price stability. They claimed that the aggressive monetary easing may lead to a weaker economy as the policy is feared to cast a dark cloud over the long-term economic prospects. Especially, crude oil prices are soaring rapidly, renewing all-time highs and increasing inflation pressure.
The Korea Institute for International Economic Policy said that the U.S. economy is likely to slow down toward the end of this year, affected by the subprime fallout. South Korean policymakers have underestimated the seriousness of the contagious effects from the spreading global financial market weakness. They must take timely and appropriate measures to prevent such global turbulence from shaking the local markets.