[Economic Analysis] US Fed Cuts Rate by 0.25%p | The 3.75% Era, Pros and Cons for the Korean Economy

[Economic Analysis] US Fed December FOMC Rate Cut (0.25%p)

The US Federal Reserve (Fed) has lowered the base interest rate by 0.25%p, ushering in the 3.75% era. However, the vote was divided, and the outlook for 2026 remains unclear. We provide an in-depth analysis of what dilemmas this "hawkish cut" presents for Korea's exchange rate and monetary policy.

US Fed 0.25%p Rate Cut: The 3.75% Era and the Korean Economy

1. December FOMC Core: There Was No Unanimity

On December 10, 2025, the US Fed adjusted the base interest rate downward to 3.50~3.75% (a 0.25%p cut). This marks the third cut this year, but the process was not smooth. The voting result was 9 to 3, showing the largest difference of opinion in recent times.

• In Favor of Cut (9 members): A preemptive measure to defend against a cooling labor market and an unemployment rate that has soared to 4.4%.
• Minority Opinion for Freeze (2 members): Argued it was premature, expressing concern over inflation that still hovers in the 3% range.
• Minority Opinion for Big Cut (1 member): Argued for a bold 0.50%p cut to prevent the risk of a recession.

In particular, this decision was a "decision made in the fog," handed down immediately after a record-breaking 43-day government shutdown, amidst a lack of key economic data.

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2. 2026 Outlook: More 'Hawkish' Than Market Expectations

Interest rates have gone down, but the future envisioned by the Fed is not as optimistic as the market expects.

According to the released Dot Plot, Fed members projected only one additional cut in 2026. This is a point that could bring disappointment to market participants who had expected aggressive rate cuts next year as well.

Furthermore, by upgrading the 2025 US GDP growth forecast to 1.7%, they expressed confidence that "the US economy remains solid." This suggests that the pace of future rate cuts will be very slow.

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3. Impact on the Korean Economy: The Gap That Isn't Closing

The US rate cut serves as a significant turning point for the Korean economy. However, domestic circumstances in Korea are too complex to accept this as purely good news.

Korea-US Rate Gap and Exchange Rate

Currently, the Bank of Korea's base rate is 2.50%. With this cut, the interest rate gap between Korea and the US has narrowed from 1.50%p (based on the upper limit) to 1.25%p. While a narrowing rate gap can reduce concerns about foreign capital outflow and contribute to exchange rate stability, the Fed's weak will to cut rates next year makes it difficult for the "Strong Dollar" trend to break completely.

Bank of Korea's Dilemma: Housing Prices vs. Domestic Economy

The Bank of Korea is walking a tightrope between the temptation to lower rates and the pressure to hold them.

Category	Factors for Cut (Dove)	Factors for Freeze (Hawk)
Key Variables	Domestic slump & Low growth rate	Household debt & Rising housing prices
Details	2025 GDP growth forecast at 1.0% Rising delinquency rate on self-employed loans	Real estate sparks remain in the Seoul metro area Household debt-to-GDP ratio

Ultimately, rather than immediately following the US in cutting rates, the Bank of Korea is expected to maintain a freeze for the time being, continuing a "cautious mode" to observe the reaction of the exchange market and trends in the domestic real estate market.

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4. Conclusion: Narrowed Rate Gap, But Exchange Rate Remains High

The US Fed's 0.25%p cut this time is stronger in character as "insurance to prevent a recession" rather than a "declaration of victory in the war on inflation."

Investors must recognize that the period where "Bad news is good news" is passing. The key now is how well the real economy actually holds up. Market participants in Korea are at a point where conservative portfolio management is necessary, considering the still-high exchange rate level despite the narrowed interest rate gap, and the Bank of Korea's limited policy room.

Key Summary:
The Fed's 0.25%p cut carries a hawkish tone, so the decline in the exchange rate will be limited. The Bank of Korea is highly likely to maintain a rate freeze stance for the time being, caught between household debt and sluggish domestic demand.

The content of this blog is for reference only regarding investment judgment, and investment decisions must be made under the individual's own judgment and responsibility. Under no circumstances can the information in this blog be used as evidence of legal liability for investment results.