Fed rate pause doesn't shut door for further cuts: Experts

US central bank could trim rates again if trade talks fail and global slowdown persists

The US central bank has signalled a pause following its latest quarter-percentage point "insurance cut" to interest rates - the third time it has cut rates this year - made in response to global trade uncertainty and slowing global growth.

Asian markets were mixed after the Fed lowered the target range to 1.5 to 1.75 per cent and indicated it was unlikely to move on policy any time soon, unless the outlook changed materially.

Japan, Hong Kong, South Korea, Malaysia and Singapore closed in positive territory, while the rest of Asia fell. The Straits Times Index was up 0.68 per cent yesterday.

But while Federal Reserve chairman Jerome Powell indicated that monetary policy is "in a good place", and that current US data does not justify an extended easing cycle, some economists say the door remains open a crack for a further rate cut should trade talks break down again, global growth continue to slow, and if inflation is benign.

For now, economists see little risk of interest rates turning negative in the United States, provided consumer spending continues to hold and trade talks turn positive.

Despite the 75 basis point reduction this year, the Fed funds' target rate remains well above the negative interest rates in the European Union and Japan, suggesting there is room for the Fed to cut rates further if the US economy continues to underperform.

Quantitative easing, to increase the supply of money, is another policy option, said Mr Kelvin Tay, regional chief investment officer at UBS Global Wealth Management.

The Fed's pause does not completely shut the door for central banks in Asia to cut rates further.

The Hong Kong Monetary Authority cut its benchmark interest rate yesterday, in line with the city's currency peg to the dollar.

The Bank of Japan kept its monetary policy stance and policy rate unchanged, but did not rule out possible rate cuts in future.

Maybank Kim Eng economist Chua Hak Bin believes Bank Negara Malaysia is unlikely to make any changes to its overnight policy rate in its upcoming policy meeting next Tuesday.

The Philippine central bank said last week it was cutting the amount of cash banks must hold as reserves by 100 basis points to boost liquidity and support growth, while Thailand's central bank left its benchmark interest rate unchanged in September after reducing it to 1.5 per cent in August.

"Come February next year when the Budget is released, the Singapore Government has plenty of fiscal policy space to support the economy. For now, the Government isn't likely to introduce an off-Budget package unless the economy sinks into recession," Dr Chua said.

Bank of Singapore head of investment strategy Eli Lee deemed the Fed's aim to keep current low rates for a little longer as a "net positive".

"If we see a stabilisation in economic conditions ahead, risk assets will benefit from a prolonged period of low rates until such time when inflation pressures become excessive, which seems distant.

"Over the near term, however, the risk of market volatility is higher. The Fed is prepared to sit tight for a time to judge if 75 basis points of rate cuts are enough to offset shocks, even as US-China trade talks remain fluid and as the incoming economic data over the next few months shows further slippage," Mr Lee said.

This means the low interest rate environment will likely continue to benefit interest-rate-sensitive sectors in Singapore such as the local property market and Reits, Mr Tay noted.

The three-month Singapore Interbank Offered Rates (Sibor), which is widely used to price mortgages, is expected to trend down gradually.

"Three-month Sibor peaked at 2 per cent earlier this year and since then has eased to its current level of 1.8 per cent. Our forecast calls for it to settle at 1.6 per cent in 2020," he said.

Mr Tay noted that SG Reits are up 20 per cent on a year-to-date basis. "Although valuations are rich, we do expect the sector to remain resilient, given the relatively easy monetary policy conditions globally."

A version of this article appeared in the print edition of The Straits Times on November 01, 2019, with the headline 'Fed rate pause doesn't shut door for further cuts: Experts'. Print Edition | Subscribe