FSS chief warns of wider market volatility as Fed raises rates for first time in over 3 years

The Financial Supervisory Service said Thursday it will monitor the potential impact of the US Federal Reserve's first interest rate hike in more than three years on domestic stock and foreign exchange markets, as well as the financial health of local institutions, and prepare for heightened market volatility.

The FSS held a financial conditions review meeting chaired by Director General Lee Chan-jin to assess financial market movements and domestic and external risk factors following the Federal Open Market Committee's decision to raise its benchmark interest rate.

The Fed raised its benchmark interest rate by 0.25 percentage point Wednesday (local time) to a target range of 3.75 to 4.00 percent — the first US rate increase since July 2023, a gap of three years and two months. The decision was unanimous among FOMC members.

The dot plot released that day showed that the median year-end rate projection among 18 of the 19 FOMC members averaged 4.1 percent — 0.3 percentage point higher than the June projection — signaling the possibility of an additional rate hike before year's end.

Against this backdrop, the FSS said it will focus closely on the risk of widening volatility in domestic stock markets. The regulator noted that trading hours have lengthened since Korea Exchange launched an aftermarket session from 4 to 8 p.m. on Monday, and that the US rate hike could amplify market swings through potential foreign capital outflows and a slowdown in AI investment.

The FSS plans to monitor whether retail investor funds are flowing excessively into high-risk products and will continue tracking trends in margin trading.

On the foreign exchange front, the regulator said it will proactively manage financial institutions' foreign-currency liquidity in anticipation that the won-dollar exchange rate — which had recently stabilized — could become volatile again. Movements in the yen stemming from a potential Bank of Japan rate hike and shifts in foreign investor fund flows will also be monitored.

The FSS will also examine the interest rate burden on businesses and households. It plans to review corporate funding conditions in the corporate bond and short-term money markets and encourage capital to flow to companies with mid- to low-grade credit ratings and those outside the greater Seoul area. For vulnerable borrowers most exposed to rising rates, the FSS said it will provide support through low-income loan programs, mid-rate lending products and debt restructuring assistance.

The regulator will also assess the risk that tighter market liquidity could increase refinancing pressure on securities firms and specialized credit finance companies. Insurers will be directed to strengthen asset-liability management to guard against mounting losses from rising interest rates.

"Given the high level of uncertainty in domestic and international markets, we will maintain our response framework on an ongoing basis and, should any warning signs emerge, coordinate with relevant authorities to take market-stabilization measures," Lee said.