Asian Markets Fall as Fed Signals Slower Pace of Rate Cuts

On Thursday, the Asian stocks slipped, trailing a sharp sell-off on Wall Street, as the U.S. Federal Reserve’s cautious tone on future rate cuts rattled investors. The Fed’s “higher for longer” policy stance and the Bank of Japan’s (BOJ) decision to hold interest rates steady added to market jitters. Meanwhile, the U.S. dollar climbed to a two-year high, reflecting the evolving global economic outlook.

After the Dow Jones Industrial Average plunged over 1,000 points on Wednesday, Asian markets reacted negatively. MSCI’s broadest index of Asia-Pacific shares outside Japan fell by 1.6%. Key markets mirrored the downtrend:

• Taiwan’s tech-heavy index declined by 1.2%.
• Australian shares slid nearly 2%.

The market turbulence is set to spill into Europe, with futures for major indices signaling losses. Eurostoxx 50 futures dropped 1.5%, German DAX futures fell by 1.2%, and FTSE futures shed 1%.

The Federal Reserve’s updated projections revealed a shift in expectations. U.S. central bankers now foresee only two 25-basis-point rate cuts by the end of 2025, which is 50 basis points less than previously anticipated in September. Chair Jerome Powell emphasized a cautious approach, reflecting concerns over persistent inflation risks.

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Powell noted that the Fed is closely monitoring the potential impacts of fiscal policies under President-elect Donald Trump, including the effects of higher tariffs and lower taxes. His statement underscores lingering uncertainties in the U.S. economy and its implications for global markets.

“The Fed’s latest guidance underscores its commitment to taming inflation, even as it considers external risks,” said Prashant Newnaha, Senior Asia-Pacific Rates Strategist at TD Securities. “This reinforces the notion of a prolonged pause at the start of 2025.”

The Fed’s guidance buoyed the U.S. dollar, pushing the dollar index, which measures the greenback against six major currencies, to its highest level since November 2022. It stood at 108.08 on Thursday. Simultaneously, U.S. Treasury yields climbed, with the 10-year benchmark note touching a seven-month high of 4.524% before settling at 4.514%.

The Japanese yen fell to a one-month low of 155.48 per dollar following the BOJ’s widely anticipated decision to keep rates unchanged. The yen, down more than 8% against the dollar this year, has been pressured by the widening interest rate differential between Japan and other major economies.

While the BOJ maintained its ultra-loose monetary policy, board member Naoki Tamura dissented, advocating for a rate hike to 0.5% due to rising inflationary risks. However, his proposal was overruled.

“The Fed’s hawkish tone gave the BOJ an opportunity to consider tightening, and the dissenting vote highlights internal debates on policy direction,” said Ben Bennett, Asia-Pacific Investment Strategist at Legal & General Investment Management. Markets are pricing in 46 basis points of BOJ rate hikes by the end of 2025, signaling a potential shift.

Gold prices rose 0.8% to $2,609 per ounce, as investors sought safe-haven assets amid market volatility. Conversely, oil prices dipped due to renewed demand concerns. In the cryptocurrency market, Bitcoin briefly slipped below $100,000 after Powell reaffirmed the Fed’s lack of interest in stockpiling the digital asset.

Investors are now awaiting comments from BOJ Governor Kazuo Ueda during his press conference, as well as the Bank of England’s policy decision later in the day. Despite signs of economic slowdown, the BOE is expected to hold rates steady, with sterling trading relatively unchanged at $1.25835.

REUTERS