Korea's chip boom catches US Fed chair's eye

As the US Federal Reserve held its key interest rate steady, Chair Kevin Warsh pointed to South Korea's importance in the global technology supply chain as a reason for tracking its economy.

"I would say I pay probably more attention to the Korean economy than you might think because when I am looking at the feedstocks effectively for this new surge in technology, a lot of it is coming from Japan and Korea, some from Singapore," Warsh said at a press conference Wednesday after the Fed announced it would keep its target rate unchanged at 3.75 percent to 4 percent.

"So I am particularly interested in what is happening in the Korean economy, usually because it is telling me what is on planes and ships coming this way," he added, suggesting that the performance of Korea's key exports, including semiconductors and automobiles, offers a gauge of the state of the US economy.

He also mentioned Bank of Korea Gov. Shin Hyun-song, whom he described as a longtime friend.

"I have known (him) for 20 years, and (he) is a very talented guy and a good friend. So I am glad he is in that post," Warsh said.

The two first crossed paths when Warsh was a Fed governor involved in the response to the global financial crisis and Shin was an economist researching financial institutions’ balance sheets and vulnerabilities in the financial system.

With the BOK's base rate set at 3 percent, the Fed's latest decision left the gap between the key interest rates of Korea and the US at up to 1 percentage point.

Despite the Fed's rate hold and Warsh's dovish remarks at the press conference, the BOK is expected to continue tightening its monetary policy, with another rate hike anticipated at its Nov. 26 meeting.

Coming just a month after its first 0.25 percentage point hike in July, the BOK's second rate increase in August marked a swift tightening of monetary policy. At the time, Shin described the move as a "preemptive action."

The economic conditions that prompted the two rate hikes — rising prices amid robust growth — remain a concern, particularly as stronger-than-expected growth adds to the policy dilemma facing the central bank.

According to data released Tuesday, Korea's real gross domestic product grew 1 percent in the July-September period, more than three times the central bank's earlier forecast of 0.3 percent. Semiconductor exports and facility investment drove the growth.

Real gross domestic income also surged 18.8 percent from a year earlier in the third quarter, marking its highest growth rate in over 48 years since 1977.

Consumer prices rose 2.9 percent year-on-year in September, remaining elevated above the BOK's 2 percent inflation target. If October inflation data also point to accelerating price growth, the case for further rate hikes could strengthen.

"Although the US Fed kept the rate unchanged overnight as expected, external risks remain, including persistent tensions in the Middle East, concerns over fiscal sustainability in major economies and uncertainties surrounding investment in artificial intelligence," BOK Senior Deputy Gov. Kwon Min-soo said at a meeting Thursday.

He added that the BOK would closely monitor domestic financial and foreign exchange markets amid major central bank decisions this week and uncertainty over US policy after Tuesday's midterm elections.