Asia worries, what is "hidden behind the curtain"?

The US Federal Reserve's "drastic" interest rate cut on September 18 has sparked speculation that the agency is holding important information about the US economy but not disclosing it.

Federal Reserve Chairman Jerome Powell must have been relieved by the way global investors reacted to the Fed’s first aggressive interest rate cut in more than four years – the first since March 2020, when markets responded to the economic shutdown caused by the spread of the Covid-19 pandemic. The market took the larger-than-expected 50 basis point easing very calmly.

Starting in March 2022, when inflation climbed to its highest level in more than 40 years, the Fed began a tightening path. During this path, the Central Bank raised interest rates by 75 basis points four times in a row, with the last rate hike coming in July 2023.

The Fed's decision to lower the federal funds rate to a range of 4.75% to 5% will not only affect banks' short-term borrowing costs, but will also impact a range of other consumer costs, including mortgages, auto loans and credit cards.

Fed Chairman Jerome Powell. (Source: AFP)

After all, the Fed's lowering of interest rates to the 4.75%-5% range is considered normal in the context of an economic recession or crisis.

A step towards populist monetary policy?

“This massive cut marks a step towards a populist Fed monetary policy,” said economist David Roche, founder of Global Strategy. “The markets want it, the media wants it. But the US economy, which is already rebalancing, doesn’t need it.”

David Roche, an expert, questioned whether the decision was wise to focus too much on the Fed's employment target rather than its inflation target. It also raises doubts about what the Fed knows about the labor market that others do not. It also suggests that the Fed is setting the equilibrium interest rate much lower than the level at which the US economy's engines are operating.

Mark Zandi, chief economist at Moody's Analytics, noted that Wednesday's cut "seems too aggressive unless you know the economy is going to start weakening significantly." Economist Ryan Sweet at Oxford Economics wondered if the Fed was admitting that it should have eased sooner.

According to him, the Fed is actually “averse to admitting policy mistakes” and the recent rate cut was a “preemptive strike to increase the likelihood that the central bank can help the US economy have a soft landing.”

Japan keeps interest rates unchanged

In Asia, economists are worried: What do Fed officials know that global markets don't?

All eyes are on Tokyo. The Bank of Japan (BOJ) begins a two-day policy meeting on Thursday, after raising interest rates to 0.25% in late July, the highest since 2008. This week, the BOJ held steady on its stance, as economic data pointed to sluggish growth ahead.

“Japan’s economy has recovered moderately, although some weakness has been somewhat visible,” the BOJ said in a statement after the meeting.

For economists, the BOJ’s moves are now being analyzed to see if it could tighten monetary policy further later this year. Even the slightest hint of tightening could send the yen soaring.

The yen has risen about 6% since July 31, fueling speculation in Asian markets. Signs that BOJ Governor Kazuo Ueda could raise interest rates again this year could upset the “balanced yen carry trade.”

This week, the BOJ maintained its stance of keeping interest rates unchanged as economic data pointed to sluggish economic growth in the future. (Source: Getty)

Twenty-five years of zero interest rates have turned Japan into the world’s leading lender. For decades, hedge funds have borrowed cheaply in yen to bet on higher-yielding assets around the globe. So sudden moves in the yen can send shockwaves through markets everywhere.

China surprises

China also surprised markets when on September 20, the world's second-largest economy kept mortgage rates unchanged, despite growing calls to help revive the crisis-hit property market and boost the national economy.

The five-year loan prime rate (LPR), widely used by Chinese banks as a reference for mortgage rates, remained unchanged at 3.85 percent, according to the People's Bank of China (PBOC).

A Reuters poll had previously predicted a cut in the LPR, especially after the Fed's "aggressive" rate cut. "I was surprised because I had expected the PBOC to follow the Fed and cut the loan prime rate by 10 basis points," said Zhang Zhiwei, president and chief economist at Pinpoint Asset Management.

Economists say the Fed's rate cut gives China more monetary flexibility to focus on reducing the debt burden on consumers and businesses as it seeks to boost investment and spending.

China had previously surprised markets by cutting short- and long-term lending rates by a large margin in July, in a move aimed at boosting growth in an economy facing a protracted property crisis and weakening consumer and business sentiment.

China's retail sales, industrial production and urban investment all grew more slowly than expected in August, missing economists' expectations, according to a Reuters poll. Urban unemployment rose to a six-month high, while annual home prices fell at their fastest pace in nine years.

"The disappointing economic data has highlighted the gloomy momentum in the economy and called for the government to deploy more fiscal and monetary stimulus. However, monetary easing and interest rate cuts may not be enough to reverse China's economic slowdown," experts said on CNBC 's Street Signs Asia on September 20.

Brendan Ahern, chief investment officer at KraneShares, stressed the need for more fiscal support to boost consumer confidence and boost property prices. He also said Beijing would see a more effective economic recovery once home prices stop falling.

Several major banks have lowered their forecasts for China's full-year GDP growth to below the government's official target of 5%. Bank of America lowered its 2024 GDP growth forecast for China to 4.8% and Citigroup cut its forecast to 4.7%.

Fed's direction?

The Fed’s policy direction is also a key variable as China’s economy, Asia’s largest, slows. That’s especially true given the apparent rift at Fed headquarters.

“I think there’s a divide,” former Dallas Fed President Robert Kaplan told NBC News. The risk, he said, is that current Fed Chairman Jerome Powell appears to be putting image above prudent economic policymaking.

For the Fed, “it’s important to decide which risk is more significant: the resurgence of inflationary pressures if they cut by 50 basis points, or the threat of recession if they cut by only 25 basis points,” said Seema Shah, chief global strategist at Principal Asset Management. “Having been criticized for being too slow to respond to the inflation crisis, the Fed may be wary of being reactive, rather than proactive, to the risk of recession.”

Once again, Asian policymakers are wondering what Jerome Powell is seeing that they are not.

“While surveys show consensus and expectations for a soft landing, the interest rate market is pricing in a full-blown recession,” said Torsten Slok, chief economist at Apollo Global Management.

Source: https://baoquocte.vn/dang-sau-quyet-dinh-ha-lai-suat-cua-fed-chau-a-ban-khoan-lo-lang-dieu-gi-an-giau-sau-tam-man-287183.html