Interest rates

Fed’s decision to raise interest rates reverberates across Asia

The US Federal Reserve’s decision to raise its target interest rate by three-quarters of a percentage point reverberated across Asia on Thursday as stocks in the region rose, while crypto saw a slight recovery after weeks of losses.

The Federal Open Market Committee (FOMC) raised the short-term federal funds rate to a range of 1.50% to 1.75% to stem a disruptive surge in inflation, and forecast a slowing economy and an increase in unemployment in the coming months.

Japan’s benchmark Topix index rose 1.6% in morning trade, while South Korean stocks rose more than 2%. The Korean won appreciated, while the yield on the benchmark bond fell.

Australian stocks also rose on Thursday, led by gains in the financials and technology sectors, with the S&P/ASX 200 up 0.5%, ending a four-day losing streak. The benchmark index fell 1.3% on Wednesday.

China’s CSI 300 rose 0.5%, although Hong Kong’s Hang Seng reversed trend as the index fell 1.5%.

Gold was flat on Thursday after jumping in the previous session due to lower Treasury yields and a weaker dollar.

The Fed cited lockdowns in China as “likely to exacerbate supply chain disruptions.” Beijing’s ongoing battle against the pandemic and Russia’s war on Ukraine were “creating additional upward pressure on inflation”, the Fed said in a statement.

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Master the prices

The Fed’s decision to raise interest rates by 75 basis points was welcomed by investors as they believed the economy would be better off in the long term if the Fed managed to get prices under control now.

“With its biggest interest rate hike in 28 years, the Federal Reserve has signaled a heightened resolve to fight inflation, even if that ends up weighing on the economy,” said Preston Caldwell, chief financial officer. US economy at Morningstar.

The FOMC vote was not unanimous. The Kansas City Fed’s Esther George was the lone dissenter, favoring a 50 basis point hike in line with previous communications from the bank.

Fed officials at the median projected the rate would rise to 3.4% by the end of this year and 3.8% in 2023 – a substantial change from March projections which saw the rate rise to 1.9% this year.

Barclays analysts expect another 50bp Fed hike in September and 25bp hikes in November, December and February 2023.

They predict a continued slowdown in the US economy. “At this time, we do not expect an outright recession, but with our base case scenario incorporating a slower GDP growth rate, the risk of a recession has become elevated,” the bank said in a statement. a rating.

“We forecast real GDP growth of 2.2% in 2023, while the Fed expects 1.7%. While the Fed hopes to avoid a recession as collateral damage in its fight against inflation, it seems comfortable with the risk.

  • Reuters, with additional editing by George Russell

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george russell

George Russell is a Hong Kong-based freelance writer and editor who has lived in Asia since 1996. His work has appeared in the Financial Times, Wall Street Journal, Bloomberg, New York Post, Variety, Forbes, and South China Morning Post. . .