South Korea said Thursday that the Federal Reserve's decision to trim its balance sheet is likely to have a limited impact on Asia's fourth-largest economy.

"I don't think the Fed's decision will have a big impact on the domestic financial markets," Bank of Korea Gov. Lee Ju-yeol told reporters at the BOK headquarters in central Seoul.

He said the decision is in line with market expectations, a view shared by Vice Finance Minister Ko Hyoung-kwon.

The US central bank announced Wednesday that it will begin gradually reducing its $4.5 trillion portfolio of bonds in October. The Fed took quantitative easing steps following the 2008 global financial crisis to bolster the economy.

The Fed kept its key interest rates steady at 1-1.25 percent, though it signaled that it could raise interest rates within this year.
 

Ko said the Fed's decision could spur long-term rates to rise, but he said there is a low possibility of any dramatic rate hike in the US, citing the small amount of monthly bond holdings reductions.

The Fed is set to shrink $10 billion a month in its balance sheet.

Ko also said that the government will take timely steps to stabilize markets in case of volatility growth.

Lee said tensions over North Korea's missile and nuclear programs are to blame for increased volatility in South Korea's financial markets.

Tensions have spiked on the Korean Peninsula in recent months as North Korea has fired intercontinental ballistic missiles and carried out its sixth and most powerful nuclear test.

US President Donald Trump said Tuesday in an address to the UN General Assembly that the US could "totally destroy" North Korea in the face of its nuclear and ballistic missile threats.

The BOK also said financial markets have shown signs of stability, though volatility has expanded temporarily in financial markets due mainly to North Korea risks.

"We should take note of the possibility that the volatility of capital inflow and outflow could increase due to North Korea risks and change in the tone of the monetary policies of major countries," BOK Deputy Governor Huh Jin-ho said. (Yonhap)