Fed rate cut gives Asia central banks room for more easing

Fed officials were split over the need for rate cuts this year, with three dissenting at the latest meeting, versus two in July.
Fed officials were split over the need for rate cuts this year, with three dissenting at the latest meeting, versus two in July.PHOTO: REUTERS

The Federal Reserve's second rate cut of the year by 25 basis points was widely expected, but with no clear consensus among the Federal Open Market Committee (FOMC) members on further cuts, there was little to inspire Asian markets yesterday.

Except for Japan, South Korea, Shanghai and Shenzhen, the rest of Asia ended lower. The Straits Times Index closed down 0.25 per cent.

The American central bank's move has also opened the door for other countries to cut rates.

Fed chair Jerome Powell said that "moderate" policy moves to cut its benchmark rate by 25 basis points should be sufficient to sustain US expansion and "provide insurance against ongoing risks".

Fed officials were split over the need for rate cuts this year, with three dissenting at the latest meeting, versus two in July. This week, two voted to have no cut, while St Louis Fed president James Bullard voted for a cut of 50 basis points.

"Looking at the latest data flow on wages, labour costs, jobs, core inflation, industrial production and currencies, we frankly find little to justify the (latest) rate cut," DBS Group research chief economist Taimur Baig said. He does not expect another cut this year, unless the US economy suddenly loses momentum or if trade war tensions escalate.

But some economists believe another cut might still take place if the United States and China fail to reach a trade deal by year end.

"The increasing dissent among FOMC members shows divergent views on the US economic outlook. As such, markets may struggle to decipher what the Fed will do next," Maybank Kim Eng economist Chua Hak Bin said. "Markets will be watching if the contraction in US manufacturing will spill over to the service sector." He added that the contraction is also increasing pressure on US President Donald Trump to reach some kind of trade deal.

The latest rate cut shows that the Fed will likely remain data-dependent, CIMB Private Banking economist Song Seng Wun noted. "The Fed has responded to slower US manufacturing growth and mild inflation by cutting rates again. But monetary policy alone cannot turn the economy around. You need fiscal policy changes, such as government spending and tax measures to lift growth," he said.

The Fed's move has wide-ranging implications for central banks in the region, many of which have already preempted the latest cut with cuts of their own. Malaysia cut rates for the first time in three years in May, as did New Zealand and the Philippines. The cuts continued in June and July, with India, Indonesia and South Korea doing the same.

Some countries had held off cutting rates as they were afraid their currencies would weaken. The Fed's latest move gives them more room to do so.

"It could be a race to the bottom on rate cutting. How much more cuts will happen will depend on the underlying growth of their economy," Mr Song said.

Last week, the European Central Bank (ECB) announced a fresh round of economic stimulus and a rate cut. Yesterday, the Hong Kong Monetary Authority cut its benchmark interest rate in line with the Fed's move, as the Hong Kong dollar is pegged to the greenback.

Bank Indonesia has cut its key interest rate for a third straight month. But Taiwan's central bank left its key policy rate unchanged yesterday, as growth is picking up.

The Bank of Japan yesterday also held off further easing even as it warned of increasing downside risks for the global economy. The Bank of England also kept rates on hold, while signalling that prolonged Brexit uncertainty will keep interest rates lower for longer.

A version of this article appeared in the print edition of The Straits Times on September 20, 2019, with the headline 'Fed effects mild rate cut amid dissent among its members'. Print Edition | Subscribe