The US Federal Reserve Board has revised its projections and now anticipates only one rate cut this year, down from the three previously expected. Approximately 50% of polled economists expect the Federal Reserve to cut rates by 25 basis points [b3dd6937]. The delay in easing rates has implications for both the US and the global economy. The US stock market reached another record high and bond yields fell, indicating a higher level of optimism than the Fed's projections would suggest. However, the delay in rate cuts affects borrowing costs in the US, making loans for home and car purchases more expensive. This is particularly significant as inflation is being driven by a shortage of housing, commodity prices, and car insurance premiums. The latest inflation data released just before the Fed's statement showed a lower-than-expected inflation rate. The Fed wants to see more evidence that inflation is on track to reach its target of 2%. While the median projection indicates a single 25 basis point rate cut, eight members of the committee believe there will be two rate reductions. The Fed remains committed to achieving a soft landing for the US economy and will respond to clear signs of a slowdown. Market investors seem to have responded more to the inflation numbers than the Fed's projections, displaying confidence in the US economy and interest rates. Other central banks, such as the Bank of Canada and the European Central Bank, have already cut their policy rates, shifting the focus from inflation to the impact of high interest rates on economic growth. The Reserve Bank of Australia is expected to reach a similar conclusion. The delay in rate cuts also affects the rest of the world, as some global peers are moving forward with rate cuts. The delay keeps the US dollar strong against other currencies, making it tougher for developing economies. Some investors and economists say there's a chance of no rate cuts this year [9699f06d].
The ripple effects of the U.S. Federal Reserve's 11-month hold on interest rates is already being felt in Asia. Despite Asian economies' robust external balances, going against strong market forces can lead to significant currency pain. Asian currencies' plunge raises alertness over coordinated intervention. Pragmatic central bankers and resilient fundamentals curb risk of capital flight [2b047d75].
The allure of U.S. interest rates staying in a range of 2% to 4% for several years is drawing money from the rest of the world into the U.S. Asia's fundamentals are different than during previous selloffs, with larger foreign exchange reserves and stronger regulatory oversight. Asian central banks are now more focused on the Fed's rate decisions. The disinflationary impact of Chinese imports is likely to be significant in Asia, particularly in the manufacturing sector. Asian economies should consider deeper rate cuts than the U.S. to support growth. Asian assets may become more attractive if the gap in real policy rates between Asia and the U.S. widens. Major institutional investors have been increasing their portfolio allocations for Asian markets, but there is still considerable scope for more funds to be sent to the region. Sustained inflows of long-term capital would help drive growth and external resilience in Asia. [7cc0684c]