Asia markets mixed, US$ down as analysts cite possible need for faster Fed rate hikes on stronger US economy

Hong Kong's Hang Seng Index was 0.52 per cent down, while Japan's Nikkei 225 was up 0.44 per cent.
Hong Kong's Hang Seng Index was 0.52 per cent down, while Japan's Nikkei 225 was up 0.44 per cent.PHOTO: REUTERS

SINGAPORE - Asian stocks saw a mixed start to Thursday trading (March 22) as investors assessed the implications of the Federal Reserve's latest policy decision.

The US central bank raised interest rates on Wednesday and forecast at least two more hikes for 2018, highlighting its growing confidence that tax cuts and government spending will boost the economy and inflation.

The Fed said it had decided to raise its benchmark interest rate by 0.25 per cent to a target range of 1.5 per cent to 1.75 per cent.

Policymakers also raised the forecast for rate hikes in 2019.

Singapore's Straits Times Index opened higher but has since fallen 0.24 per cent from Wednesday's close to 3,502.71 as at 10.43am.

Hong Kong's Hang Seng Index was 0.52 per cent down, while Japan's Nikkei 225 was up 0.44 per cent.

Meanwhile, the Singdollar and regional currencies made gains against the greenback - one US dollar can now buy about S$1.3128, down from S$1.3187.

Gold also rose 1.15 per cent to reach US$1,330.85 per ounce.

Federal Reserve chaiman Jerome Powell, who officially took on the role on Feb 3, also sounded a warning about rising trade tensions.

The Trump administration recently announced steel and aluminium tariffs and is weighing sanctions against China. Mr Powell said some Fed members are worried about the possibility of a trade war.

Bank of Singapore chief economist Richard Jerram said the latest Fed policy announcement appears to confirm that Mr Powell's Fed will continue to raise interest rates slowly, while changes to the outlook will be "incremental and reactive".

 

Monetary policy is not set to turn "tight" until 2020, but Mr Jerram said interest rates will likely need to rise faster than the Fed suggests.

"Our expectation is that interest rates will go up faster than the Fed expects, and that policy will be tight before the end of 2019," he said.

"This opens the possibility - certainly only a possibility at this stage - of recession in 2020, especially if fiscal policy is tightening in response to the blow-out in the budget deficit. The problem is that monetary policy works with a lag, and at some point the Fed will need to stop being behind the curve, and take a more forward- looking approach."

Charles St-Arnaud, senior investment strategist at Lombard Odier Investment Managers, said the main surprise for many investors was that the Fed continued to expect three hikes this year rather than moving to four hikes.

"Many investors would have expected that the Fed would have upgraded its view given the stronger growth, the lower expected unemployment rate and improved economic outlook," he noted.

"In some ways, the increase in the rates path for 2019 may be the first step and that extra hike could be brought later this year. Our view remains that the Federal Reserve will hike its policy rate by three more hikes this year, as we believe that inflationary pressures are building up in the US."