Global Markets React to Fed’s Cautionary Tone
The US Federal Reserve’s latest interest rate decision has sent shockwaves through global markets, with Asian stocks plummeting, bond yields surging, and the dollar nearing a two-year high. The Fed’s Chair, Jerome Powell, hinted at a more cautious approach to rate cuts in the coming year, catching investors off guard.
A New Phase for Monetary Policy
Powell’s remarks signaled a shift in the Fed’s stance, with the central bank now projecting only two quarter-percentage-point rate reductions by the end of 2025. This is a significant reduction from previous expectations, and investors are scrambling to adjust their bets on future rate cuts.
Dollar Strengthens, Stocks Slump
The dollar index, which measures the US currency against six rivals, soared to its highest level since November 2022. Meanwhile, Asian stocks followed Wall Street’s lead, with MSCI’s broadest index of Asia-Pacific shares outside Japan tumbling 1%. Japan’s Nikkei fell 1.8%, and Australian shares slid more than 2%.
Inflation Projections Take Center Stage
The Fed’s inflation projections reinforced the notion that interest rates will remain higher for longer. Prashant Newnaha, a senior Asia-Pacific rates strategist at TD Securities, noted that the shift in policy guidance aligns with his view of a long pause by the Fed at the start of 2025.
Bank of Japan Decision Looms
The Bank of Japan’s policy decision, set to be announced later in the day, has taken on added significance in light of the Fed’s cautionary tone. Japan’s 10-year government bond yield surged, and the yen hovered around the 155 per dollar mark, under pressure from a strong dollar and a wide interest rate disadvantage.
Market Expectations Shift
Traders are currently pricing in just a 20% chance of the BOJ hiking rates later on Thursday, with policymakers keeping markets guessing. Investor focus will be on comments from BOJ Governor Kazuo Ueda to gauge the timing and extent of future rate hikes. Carol Kong, a currency strategist at Commonwealth Bank of Australia, believes the recent sharp yen weakening will add pressure on the BOJ to hike on Thursday.
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