Fed Rate Cut Stirs Global Market Uncertainty

Equities wavered in Asia on Thursday after the Federal Reserve lowered interest rates but left investors wondering how many more cuts were in the pipeline despite boss Jerome Powell warning about the struggling jobs market.

After months of speculation fuelled by a string of weak labour statistics, the US central bank said it would lower borrowing costs 25 basis points, its first reduction since December.

The 11-1 decision to cut — US President Donald Trump’s appointee Stephen Miran voted for a 50-point cut — came even as inflation continues to run well above policymakers’ two per cent target, but analysts said the main focus was on jobs.

In its post-meeting statement, the Fed said “downside risks to employment have risen” and inflation has picked up and “remains somewhat elevated”.

Powell said in a news conference that the pass-through of tariffs to consumers had been slower and smaller than expected.

“Labour demand has softened, and the recent pace of job creation appears to be running below the break-even rate needed to hold the unemployment rate constant,” he told reporters.

The bank’s closely watched forecast for future rates showed some division on the path forward, with a narrow majority of the 19 officials assessing the outlook eyeing two more cuts but seven projecting none.

And Powell remained cagey, saying decision-makers were approaching it “meeting by meeting”.

Michael Pearce of Oxford Economics said the figures showed a “stark divide” that was “unusual” and that the October move could depend on jobs figures.

US markets ended on a tepid note, with the Dow up but S&P 500 and Nasdaq down.

Asian investors were also cautious.

Tokyo rose as the Fed decision boosted the dollar against the yen and other currencies, helping Japanese exporters, while Hong Kong and Shanghai swung in and out of positivity.

Seoul, Taipei and Jakarta rose, while there were losses in Sydney, Singapore, Wellington and Manila.

“The selloff in rate markets after the presser suggests that investors were looking for Powell to lean more decisively toward the employment mandate,” said economists at Bank of America.

“We stick with our view that the Fed will cut only once more this year, in December.

“However, after Powell’s comment that (the) rate cut ‘isn’t just one action, the risk has risen that the second cut will be pulled forward to October (with potentially a third cut in December).”

Jack McIntyre at Brandywine Global, part of Franklin Templeton, said the Fed is “putting more emphasis on the softening in the labour market”.

“It makes sense that more rate cuts are expected as monetary policy works with a lag and labour market statistics are a lagging economic indicator.

“The weakening labour market will have a deleterious impact on inflation, so the Fed is willing to wait out sticky inflation.”

The split in the Fed outlook “probably means more volatility in financial markets next year”, he added.

Gold prices held losses around $3,660, having spiked on Wednesday at a record above $3,707.

In company news, Australian energy group Santos plunged nearly 12 per cent in Sydney, after a consortium led by the state-owned Abu Dhabi National Oil Company said Wednesday it had retracted a takeover bid.

– Key figures –

Tokyo – Nikkei 225: UP 1.1 per cent at 45,277.43 (break)

Hong Kong – Hang Seng Index: DOWN 0.4 per cent at 26,813.58

Shanghai – Composite: UP 0.2 per cent at 3,882.18

Euro/dollar: UP at $1.1816 from $1.1811 on Wednesday

Pound/dollar: DOWN at $1.3622 from $1.3626

Dollar/yen: UP at 147.04 yen from 147.00 yen

Euro/pound: UP at 86.74 pence from 86.70 pence

West Texas Intermediate: DOWN 0.5 per cent at $63.73 per barrel

Brent North Sea Crude: DOWN 0.4 per cent at $67.66 per barrel

New York – Dow: UP 0.6 per cent at 46,018.32 (close)

London – FTSE 100: UP 0.1 per cent at 9,208.37 (close)

AFP