21st September 2023 – (Hong Kong) Asian stocks experienced a sharp decline on Thursday (Sep 21) and the dollar strengthened following the Federal Reserve’s indication that it could raise interest rates again this year and maintain them at elevated levels for a longer duration than expected, as it grapples with taming inflation.
Despite the world’s largest economy remaining robust and the labor market showing little signs of weakening, central bank officials appeared confident that they had sufficient room for further tightening of monetary policy without triggering a recession, according to analysts.
During the much-anticipated Fed meeting on Wednesday, borrowing costs were kept at a two-decade high, as anticipated. However, the board’s “dot plot” projections for future rates pointed towards another increase this year and only two cuts next year, instead of the previously expected four.
The hawkish stance dealt a blow to market sentiment among traders who had concerns about more restrictive measures, especially after recent data indicated that 11 interest rate hikes over 18 months had not yielded the desired impact on inflation, which remains well above the central bank’s 2 percent target.
“We are prepared to raise rates further, if appropriate, and we intend to hold policy at a restrictive level until we’re confident that inflation is moving sustainably toward our objective,” said Fed Chairman Jerome Powell during a post-decision press conference.
All three major Wall Street indexes ended significantly lower, with the Nasdaq suffering a loss of more than 1 percent as technology firms were hit due to their vulnerability to higher borrowing costs.
Asian markets followed suit, with Tokyo, Hong Kong, Shanghai, Sydney, Seoul, Singapore, and Taipei all experiencing selling pressure.
Stephen Innes from SPI Asset Management stated that while the Fed was “more self-assured that it can achieve a soft landing and that the economy can sustain higher rates for a longer period,” traders sought reassurance that the tighter policy environment could be managed without significant pain.
“In the near term, there is a possibility of the opposite happening,” he cautioned.
He warned that growth might soften in the fourth quarter due to factors such as the resumption of student loan repayments, the UAW (auto) strike, and the potential federal government shutdown.
The Bank of Japan (BoJ) is now in the spotlight ahead of its own meeting on Friday. Officials have recently indicated that they are closely monitoring forex markets, fueling speculation that they may intervene to protect the yen if it continues to weaken.
The BoJ meeting takes place amid swirling speculation that the bank may consider moving away from its long-term ultra-loose monetary policy and yield curve control, in which it manages the range within which government bond yields fluctuate.
However, Matt Simpson from City Index believes it is “unlikely the BoJ will announce any change of policy (Friday) or soon for that matter.”
“Although you never know for sure with this central bank,” he added.
“The BoJ widened their YCC band recently, and whilst (governor Kazuo) Ueda prompted some excitement that the BoJ may hike rates before abandoning YCC control, he dismissed the possibility of it being this year.”
Oil prices extended their losses for the week due to the prospect of higher US interest rates, while the stronger dollar made it more expensive for clients using other currencies.
The recent decline over the past few days has pared back the commodity’s rally since Russia and OPEC leader Saudi Arabia announced that production cuts would continue until the end of the year.