Asian stocks were mostly lower after the US Federal Reserve trimmed its benchmark policy rate for the first time in more than a decade, but refused to commit to more cuts down the road.
In a widely anticipated move, the United States central bank cut its key rate by 25 basis points early yesterday morning. Some analysts called it a "hawkish" cut as Fed chairman Jerome Powell described the move as a "mid-cycle adjustment to policy" rather than "the beginning of a lengthy cutting cycle". Two Fed officials voted against the cut, favouring no move.
Following Mr Powell's comments, the US dollar strengthened against major currencies including the pound, euro and yuan. Against the Singapore dollar, the greenback rose to 1.3750 yesterday from 1.3687 on Wednesday.
Except for Japan and Malaysia, all other markets in Asia ended in negative territory. Japan rose 0.1 per cent as the yen weakened against the greenback, which is seen as positive for Japanese exporters. The Straits Times Index fell as much as 0.58 per cent at yesterday's opening, but pared losses to end down 0.27 per cent.
Rate cuts are usually welcomed as they spur lending, spending and growth. But the reluctant nature of this cut rattled investors.
That is what a hawkish cut looks like, Morgan Stanley said in a note to clients. "The minimal size of the cut, the dissents and Powell's press conference disappointed markets and undercut our expectation."
In his latest challenge to the US central bank's independence, US President Donald Trump, who called earlier this week for a large cut in the benchmark rate, tweeted that "Powell let us down".
But to put things in perspective, Mr Hou Wey Fook, DBS Bank's chief investment officer, pointed out that markets have been overly exuberant in their rate cut expectations. "The key impetus behind the plausible Fed 'insurance cut' is mainly US-China trade uncertainty, as opposed to a drastic deterioration in fundamentals", he noted.
Maybank Kim Eng senior economist Chua Hak Bin said that if anything, the 25-basis-point cut showed the Fed is not worried about US growth and inflation, and could well "afford to stay on hold in the third quarter".
The greenback is not expected to hold its strength either, Dr Chua added. "For a sustained US dollar rally, the Fed has to raise rates, which isn't likely to happen any time soon."
CIMB Private Banking economist Song Seng Wun said that with just six weeks to the next Federal Open Market Committee meeting, the prospect of another cut will depend on upcoming data releases. "We may see more market volatility driven by data flow and US-China trade developments," he said.
Despite the slowdown in export-driven economies in Asia, central banks in the region still have weaponry to deploy.
"The good news here is that with low inflation, most Asian central banks will continue to ease or cut rates, including Indonesia, the Philippines, and even the Bank of Thailand may surprise with a rate cut. The Fed is no longer in a tightening cycle like they were six to eight months ago, so the repercussions of an easing move for dollar-sensitive markets in Asia are not as bad," Dr Chua said.
Mr Song said Singapore might also ease its monetary policy.
"Whether the Government will need to roll out Resilience Package 2.0 after the first one 10 years ago depends on labour market conditions and the economy's performance in the coming months," he added.