SINGAPORE – Asian markets followed Wall Street southwards on Thursday after Federal Reserve chairman Jerome Powell dashed hopes of an immediate pivot on the United States central bank’s aggressive monetary policy.

In Singapore, the Straits Times Index (STI), which had recently regained its foothold above the key 3,000-point support level, closed down 38.62 points, or 1.2 per cent, at 3,102.51.

Bank shares, which usually benefit from rising interest rates, took a beating on the prospect of higher rates hurting the economy, before recovering some ground.

Shares of DBS, which on Thursday morning posted a 32 per cent jump in third-quarter earnings, closed down 1.6 per cent at $34.20. OCBC Bank fell 0.9 per cent to $11.95, while UOB dipped 0.2 per cent to $28.02.

Australia’s ASX 200 tumbled 1.8 per cent, while South Korea’s Kospi declined 0.3 per cent.

In Hong Kong, whose currency is pegged to the US dollar, the Hang Seng Index sank 3.1 per cent. China’s Shanghai Composite Index closed down 0.2 per cent, snapping a two-day rally. Japan’s market was closed for a public holiday.

Overnight on Wall Street, the Dow Jones initially rose, then fell to end the session with a 505.44-point or 1.6 per cent loss at 32,147.76 points as the news sank in. The S&P 500 fell 96.41 points or 2.5 per cent to 3,759.69 points.

The Dow had gained 13 per cent over the past month, boosted by better-than-expected earnings and hopes of a Fed pivot.

Announcing an increase of 75 basis points (bps) in its key lending rate on Wednesday – the Fed’s fourth consecutive jumbo rate hike – Mr Powell dismissed the idea that the central bank may be pausing its rate hikes soon.

“It is very premature to be thinking about pausing,” he said. “People, when they hear ‘lags’, think about a pause.

“It is very premature, in my view, to think about or be talking about pausing our rate hikes. We have a ways to go.”

While he signalled that future increases in borrowing costs could be made in smaller steps to account for the Fed’s front-loading of rate hikes, he warned that rates could well end up higher than policymakers had estimated at their last meeting in September.

He also conceded that the path towards a soft recessionary landing for the US economy was “narrowing”.

OCBC’s chief economist Selena Ling noted that market speculation had been too hopeful for a dovish policy pivot to an earlier pause or even a rate cut, although future rate hikes could be smaller.

“The Fed’s message was very clear – front-loading of aggressive rate hikes is done, so a taper to 50bps for the December FOMC is likely,” she said, referring to the Federal Open Market Committee.

Indeed, while raising the lending rate by 75bps this week, Mr Powell hinted that the time to reassess the pace of increases “is coming”, signalling that future hikes in borrowing costs could be smaller.

Whatever the case, the Fed’s latest action and Mr Powell’s words have cooled some of the optimism that lifted markets in recent weeks.

UOB senior economist Alvin Liew noted that Mr Powell had made clear that the Fed was not easing up on rates any time soon, and the ultimate level, or terminal rate, at which the current tightening round ends would be higher than previously expected.

“So we are now inclined to lift the terminal rate above our current 4.5 per cent to 4.75 per cent,” he said.

“But the part I am most conflicted about is the Fed pivot. Powell did say it would be appropriate to slow the pace of increase ‘as soon as the next meeting or the one after that’.

“So I am inclined to stick to our call for a 50bps hike in December and either raise the number of hikes or the magnitude of hikes in the first quarter of 2023.”

Still, brokers noted that the market had not reacted as negatively as one might expect, largely due to the somewhat mixed message – that while a pivot was not imminent, future rate hikes could be smaller.

All eyes are now on whether the Fed will moderate its policy at its December meeting.

The latest rate hike has lifted the Fed’s short-term target range of 3.75 per cent to 4 per cent, the highest level since January 2008. The futures market is anticipating the terminal rate to peak at between 5 per cent and 5.5 per cent by May 2023.