The Rough and Tumble Education of a Central Banker

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It’s been a steep learning curve for Rhee Chang-yong. The central bank he leads, in one of the world’s bellwether economies, was miles ahead of the Federal Reserve in beginning to tackle inflation. And still the job keeps getting harder. In the six months since he became Bank of Korea governor, Rhee has wrestled with rapid price increases, executed the only two half-point interest-rate hikes in the agency’s history and strived to be more open about the bank’s plans. The latter is tricky at the best of times, and a herculean task during periods of great strain in world markets. On paper, he came to the gig superbly prepared: For eight years, he ran the Asia-Pacific department of the International Monetary Fund and was chief economist at the Asian Development Bank. The challenges Rhee faces encapsulate the trials of most central bankers in 2022. He’s been forced to contend with an epic rally in the dollar that’s pounded the Korean won, pushed the bank to intervene in markets and given Rhee pause about how much guidance to provide to investors. Who could blame him for expecting a plague of locusts next? “I have to confess that it’s much harder than just writing a paper,” he told the Peterson Institute for International Economics in Washington this month. Despite his recent appointment, Rhee is no neophyte when he comes to the trade-offs officials typically confront. There is the perennial question of how fast you tighten policy lest you choke the expansion. To that add currency-market ructions, which ambushed Rhee’s laudable efforts to inject some candor into the bank’s historically opaque workings. The won tumbled 9% in the third quarter alone and is down about 17% this year, a decline in Asia second only to the battered Japanese yen. Rhee has little choice but to plow ahead. Like many officials in emerging markets, and quite a few in advanced economies, Rhee isn’t master of his own destiny. The common thread is the dominance of the greenback, a product of the Fed’s clout and how America’s response to skyrocketing inflation is driving choices in places popularly thought to be more under the sway of Chinese leader Xi Jinping than Fed Chair Jerome Powell.

To hear it from Rhee, the intent isn’t to reverse the slide in the local currency against the dollar or even about holding a line on trading screens. It’s about cushioning the won’s decline and preventing the tumble from worsening inflation. That’s a distinction often hard to manage in practice: Koreans have bitter memories of the hardships encountered during the Asian financial crisis of the late 1990s when the currency’s implosion led to a deep recession and the nation required a humiliating rescue from the IMF.

The Fed’s course has upended plans, pushing even early movers against inflation into more reactive positions and driving some embarrassing about-faces in forward guidance. In the case of Korea, Powell & Co. led Rhee to suspend intentions to move in quarter-point increments after a 50-basis-point increase in July.

Rhee was unusually candid after the big July hike and indicated smaller steps were now likely. He told the Peterson audience he had several points to get across: People shouldn’t overreact to the norm-busting, half-point step, and he wanted a sense of how previous increases were flowing through the broader economy. In addition, inflation and wage increases weren’t approaching levels in the US or Europe.

But global market gyrations tripped him up, specifically the acceleration in the dollar’s ascent after the Federal Open Market Committee’s September meeting, which projected higher rates ahead than anticipated. That shock exacerbated a slump in the yen that forced Japan to intervene to support the currency for the first time in a generation and made UK markets vulnerable to the reckless fiscal package that drew the Bank of England into the bond market to protect pension funds. “The Bank of Korea is now independent from our government, but not from the Fed,” Rhee said. He was criticized for returning to 50 basis points. Scrutiny—and often tougher treatment than that—comes with the job. Rhee stresses that guidance isn’t a promise, a caveat that’s commonplace in the monetary arena. Fair enough. But people tend to hear a number or a date and then zero in on that. They are wired to tune out the qualifiers. Reserve Bank of Australia Governor Philip Lowe would be sympathetic. Lowe has been chastised for suggesting late last year rates might not rise until 2024. It was never a guarantee, but nuances can be missed when interest rates and price increases move from the back pages to leading the evening news bulletins. Chastened, the RBA is conducting an internal review of forward guidance. It’s also subject to an external evaluation commissioned by the government. Communications is part of the probe. The difficulty lies in trying to adapt signaling the direction of monetary policy — a tool that came of age during the years of too-low inflation after the 2008 crackup — to an era of high inflation. Markets became hooked on the handholding. The risk is that Korea is trying to be more transparent about its path at precisely the time when circumstances make it hardest. Perhaps a bit of Alan Greenspan’s studied vagueness wouldn’t go astray. The education of this central banker has been brutal and isn’t over. When the current drama subsides, both fundamentally in terms of inflation being put under control and some stability returning to markets, I would love to hear or read Rhee’s autopsy. Let’s hope he doesn’t retreat into opacity, as tempting as that may be. Anyone with an interest in the success of Korea’s economy, a vital exporter, should wish him well.

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The Rough and Tumble Education of a Central Banker

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