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South Korea intends to restore an agreement to suspend some military activity along the border with North Korea, President Lee Jae Myung said on Friday, as his government seeks to improve relations between neighbours still technically at war.

The 2018 military accord was designed to curb the risk of inadvertent clashes, but broke down after a spike in tensions.

WHAT HAPPENED IN 2018?

The so-called Comprehensive Military Agreement (CMA) signed between the two Koreas was the most substantive deal to result from months of historic meetings between leader Kim Jong Un and then-South Korean President Moon Jae-in.

On September 19, 2018, South Korea's defence minister and his North Korean counterpart signed the CMA in the North's capital, Pyongyang, accompanied by polite applause from the onlooking leaders.

Under the CMA, both countries agreed to "completely cease all hostile acts against each other" and implement military confidence-building measures in air, land and sea domains.

The measures included the two sides ending military drills near the border, banning live-fire exercises in certain areas, the imposition of no-fly zones, the removal of some guard posts along the Demilitarized Zone, and maintaining hotlines.

On the ground, both sides agreed to completely cease artillery drills and field training within 5 km (3 miles) of the Military Demarcation Line (MDL) between the countries.

At sea, they installed covers on the barrels of naval guns and coastal artillery and closed gun ports in a buffer zone along the sea border.

MILITARY DEAL FALLS APART

With inter-Korean and denuclearisation talks long stalled, the military accord started to fracture in recent years amid drills and shows of force along the fortified border between the Koreas as they accused the other of breaches.

North Korea's launch of a spy satellite in 2023 further ratcheted up tensions on the Korean peninsula, and the countries walked away from the confidence-building pact.

South Korea's National Security Council that year moved to "suspend the effect of Article 1, Clause 3" establishing no-fly zones close to the border in the 2018 military agreement, enabling Seoul to restore reconnaissance and surveillance activities along the border.

South Korea's military then restarted aerial surveillance in border areas, the defence ministry said.

North Korea in return said its army would "never be bound" by the pact, ripping up the agreement and vowing to restore all military measures it had halted under the deal.

In June 2024, former South Korean President Yoon Suk Yeol declared a complete suspension of the military pact in response to North Korea's move to send hundreds of rubbish-stuffed balloons across the border.

Later that year, as hostilities increased state-run news agency KCNA said North Korea amended its constitution to designate the South as a "hostile state".

HOW WILL PYONGYANG RESPOND?

President Lee, who won a snap election in June, has sought to re-engage Pyongyang after a period of cross-border tension and shown a willingness to return to dialogue.

He touted on Friday his government's efforts to ease tensions, including halting the launch of balloons floated by activists with anti-North Korea leaflets and dismantling loudspeaker propaganda broadcasts across the border.

How Pyongyang might respond remains unclear. Top North Korean officials have in recent weeks dismissed moves taken by Lee's new liberal government to ease tensions.

Some analysts are also sceptical about the short-term prospects of a favourable response from North Korea to such overtures.

Source: Reuters

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US Treasury Secretary Scott Bessent said he isn’t calling for a series of interest-rate cuts from the Federal Reserve (Fed), just pointing out that models suggest a “neutral” rate would be about 1.5 percentage points lower.

“I didn’t tell the Fed what to do,” Bessent said on Thursday in an interview on Fox Business, referring to his comments a day before about how the central bank “could go into a series of rate cuts here”.

Bessent said Thursday that “what I said was that to get to a neutral rate on interest, that that would be approximately a 150-basis-point cut”.

The so-called neutral rate is the level at which policy neither stimulates nor restricts the economy. Fed chair Jerome Powell said July 30 that there are “a range of views of what the neutral rate is at this moment for our economy” and that his own estimate was that the current setting was “modestly restrictive”.

“I believe that there is room, if one believes in the neutral rate,” for a series of rate cuts, Bessent said. “I am not calling for one. I didn’t call for one. I just said that a model of a neutral rate is approximately 150 basis points lower.”

The Fed last month kept its target range for the benchmark rate at 4.25% to 4.5%. The median estimate of the neutral rate among Fed officials over the long run is 3%. Powell and many of his colleagues have for months argued that more time was needed to assess any impact on inflation and inflation expectations from President Donald Trump’s tariff hikes.

‘Direct’ pressure

Trump has regularly criticised Powell for holding rates. Bessent, after taking the Treasury’s helm, said he would only address past Fed actions, not future ones, but later weighed in on what he thought markets were expecting monetary policymakers to do. This week, he has taken to referring to economic models, and has repeatedly suggested a 50-basis-point rate cut is possible at the Fed’s September meeting.

“It’s not really the role of the Treasury secretary to opine” on the neutral rate, said Julia Coronado, the founder of the research firm MacroPolicy Perspectives and a former Fed economist. “The fact that the most senior economic official in the administration is saying these things publicly is direct, public pressure on what he wants the Fed to do.”

Former Treasury secretary Lawrence Summers, who served under Democratic president Bill Clinton, said he was “surprised” to see Bessent’s remarks on Wednesday.

“Usually that kind of judgement is not made by administration officials, and I am not sure it’s helpful for the administration to be publicly prescribing on monetary policy,” Summers said on Bloomberg Television’s Wall Street Week with David Westin.

Futures pricing

Summers, a paid contributor to Bloomberg TV, also suggested that a measure of the neutral rate should incorporate the effects of large budget deficits and elevated demand for funds to pay for data centres — along with higher asset prices that reduce the flow of funds into savings. Against that backdrop, “you wouldn’t be prescribing a 175 basis point cut in rates unless we see a recession”.

Interest-rate futures as of Thursday morning reflect bets that the Fed will cut rates by less than a cumulative 150 basis points by the end of next year. They also show slightly less confidence in a 25-basis-point reduction at the September meeting. The retreat came after a release on US wholesale inflation showed those prices climbed by the most in three years.

Speaking to Bloomberg Television on Wednesday, Bessent said “if you look at any model” it suggests that “we should probably be 150, 175 basis points lower” on the Fed’s benchmark. He also said that officials might have cut rates if they had been aware of the revised data on the labour market that came out a couple of days after the latest meeting. “I suspect we could have had rate cuts in June and July,” Bessent said.

Which model?

“I don’t know what model he’s talking about,” said Jim Bianco, the president of Bianco Research and a long-time Fed and Treasury watcher. “There is no model I am aware of that says it should be that low,” he said of the Fed’s benchmark.

Other gauges of where the Fed should be, such as the Taylor rule, also aren’t arguing that the main rate should be 150 to 175 basis points lower than it is, Bianco said. He added that there have been many instances over the decades of “cajoling Fed chairs,” and they are “welcome to offer their opinion,” but it shouldn’t change the central bank leader’s opinion.

Bessent repeated on Thursday that, given the context of the weaker jobs figures and not having cut rates the past couple of months, “perhaps a 50-basis-point cut in September was warranted”.

Two Fed district bank presidents said they are not backing such a move at this point. San Francisco Fed president Mary Daly said in a Wall Street Journal interview on Wednesday, “I just don’t see that. I don’t see the need to catch up.” St Louis president Alberto Musalem said on CNBC on Thursday, that a 50-basis-point cut would be “unsupported by the current state of the economy and the outlook for the economy”.

Source: Bloomberg

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