SINGAPORE – Asian stock markets traded on a cautious note on Thursday after the United States Federal Reserve paused its rate hike campaign but indicated at least a 50-basis-point rise in its key lending indicator for the rest of 2023.
Japan’s Nikkei 225 index slipped 0.05 per cent, while Singapore’s Straits Times Index was up 0.8 per cent and Australia’s S&P/ASX 200 index edged 0.19 per cent higher.
Hong Kong’s Hang Seng Index jumped 2.17 per cent as China’s central bank cut its key interest rate.
South Korea’s Kospi index dipped 0.4 per cent.
Wall Street futures were in the negative while European markets opened in the red as Asia closed.
This comes after the US central bank kept interest rates unchanged on Wednesday but signalled new economic projections that borrowing costs will likely rise by another half of a percentage point by the end of 2023.
With the pause, the Fed funds rate now remains at 5 per cent to 5.25 per cent.
Fed chairman Jerome Powell said that with US inflation still well above the central bank’s 2 per cent target, future rate decisions would be made on a meeting-by-meeting basis.
“I think if you look at our core PCE inflation overall, look at it over the last six months, you’re just not seeing a lot of progress,” Mr Powell said. PCE is personal consumption expenditure, the Fed’s preferred gauge of prices.
The Fed raised its inflation forecast for 2025 to 2.2 per cent, from 2.1 per cent previously.
On Wall Street overnight, the Dow Jones Industrial Average fell 232 points to 33,979.33 to close 0.7 per cent lower, while the S&P 500 ended almost unchanged at 4,372.59.
The market has a 60 per cent expectation of a 25-basis-point hike in July, and one more 25-basis-point hike in September, with the peak rate for 2023 revised to 5.6 per cent.
“This is a very hawkish skip indeed,” noted Ms Selena Ling, chief economist at OCBC Bank.
“That said, the dots plot still points to some rate cuts in 2024 of up to 100 basis points. So maybe they have postponed the inevitable. Nevertheless, we will have to wait and see if they can really deliver on what they promised.”
She added that the Fed’s forward statement was a setback to the real economy, especially for those wishing for some relief on the interest rate front, such as companies and individuals with loans.
Some analysts such as Mr Nigel Green, chief executive of independent financial advisory deVere Group, warned of potential economic damage as the Fed funds rate reaches for 6 per cent by the end of 2023. “The battle against inflation is being won. This is now the time for the Fed to stop – not pause – interest rate hikes,” he said.
“The time lag for monetary policies is notoriously long. It typically takes about 18 months to two years for the full effect of rate hikes to filter fully into the economy. We’re now beginning to see the drag effects on the world’s largest economy, with households and businesses becoming considerably more cautious.”
Indeed, with the Fed funds rate expected to stay higher for longer, credit tightness is likely to prevail for a while, thus putting a squeeze on borrowers. Corporate profitability could be impacted, say analysts. “Borrowers will potentially need to brace themselves for some more pain on the interest rate front as the Fed buys time to assess the impact (of its rate hikes) on the economy,” Ms Ling added.
