By Ankur Banerjee
SINGAPORE (Reuters) – Asian shares fell, bond yields rose and the dollar was near a two-year high on Thursday after the U.S. Federal Reserve warned the pace of interest rate cuts would slow in the coming year and investors braced for a Bank of Japan policy decision.
The Fed cut rates on Wednesday as expected, but Chairman Jerome Powell’s explicit references to the need for caution from now on sent US stocks sharply lower, with Treasury yields rising and traders scaling back their bets on rate cuts next year.
The Dow Jones Industrial Average fell more than 1,000 points. [.N]
Asian shares have followed Wall Street’s lead, with MSCI’s broadest index of Asia-Pacific shares outside Japan falling 1%. Japan’s Nikkei fell 1.8%, while Australian shares fell more than 2%.
“I think we’re in a good place, but I think it’s a new phase from now on and we’re going to be cautious about further cuts,” Powell said at a news conference.
U.S. central bankers now predict they will cut interest rates by just two quarters of a percentage point by the end of 2025, which is half a percentage point less in easing next year than officials expected as of September.
“The Fed has been more aggressive than we expected, but today’s shift in policy guidance fits squarely with our view of a long Fed pause at the start of 2025,” said Prashant Newnaha, senior Asia-Pacific rates strategist at TD Securities.
“The most meaningful surprises have focused on inflation projections. They strengthen longer-term inflation expectations.”
Shifting expectations for Fed rate cuts pushed the dollar index, which measures the US currency against six rivals, to its highest level since November 2022 on Wednesday. It was last at 108.15 in early trading on Thursday. [FRX/]
Sterling was steady at $1.25835 ahead of the Bank of England’s policy decision later in the day. The central bank is expected to keep interest rates unchanged despite signs of a slowing economy.
The yield on US 10-year benchmark bonds hit a seven-month high of 4.524% on Wednesday and was last at 4.51% in early Asian hours.
Tony Sycamore, market analyst at IG, said the outcome of the Fed meeting should not have come as much of a surprise to investors who have been watching the recent run of warm U.S. inflation and activity data.
“However, it has served as a catalyst to wash away some of the speculative excesses that poured into risky assets including stocks and Bitcoin after the US election,” he said.
Bitcoin fell to $100,340 after falling 5% on Wednesday after Powell said the US central bank does not want to be involved in government efforts to stockpile large amounts of bitcoin.
