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U.S. Federal Reserve Chair Jerome Powell speaks during a press conference in Washington, D.C., on September 17 after the Fed announced a 0.25 percentage point rate cut. / Source: AFP-Yonhap

The U.S. Federal Reserve cut its benchmark interest rate by 0.25 percentage point to a range of 4.00–4.25% on Tuesday, narrowing the gap with South Korea’s 2.50% rate to 1.75 percentage points and complicating the Bank of Korea’s next move.

It was the Fed’s first rate cut in nine months and the first since President Donald Trump took office, following five straight holds since December. The decision reflects concerns over slowing growth, weaker job creation, and a rising jobless rate, even as inflation remains elevated.

“The focus of today’s decision was the risks we see in the labor market,” Fed Chair Jerome Powell told reporters, pointing to a “strange balance” of falling demand and labor shortages. He noted that while August’s 4.3% jobless rate and first-half growth of 1.5% were not disastrous, the labor market’s weakening outweighed inflation concerns.

Powell also acknowledged that Trump’s tariff policies are adding to inflationary pressures, with higher goods prices likely to continue into next year, though much of the impact has so far been absorbed within supply chains.

The Fed’s year-end projection for its policy rate is 3.6%, signaling two more cuts could be on the way. For Seoul, that means less pressure to maintain a wide rate gap, and renewed debate over whether to ease policy to shore up a slowing economy.

Still, the Bank of Korea faces a dilemma. While lower rates could stimulate growth, household debt and rising home prices—particularly in Seoul’s Gangnam, Mapo, and Seongdong districts—remain major risks. Despite the government’s June 27 housing measures, mortgage debt has yet to fall significantly.