Asian stocks mixed after Federal Reserve chair pushes back on hopes for interest rate cut

Asian equities were mixed after Federal Reserve chair Jay Powell pushed back against the suggestion that the US central bank might begin cutting interest rates to cushion the blow from banking sector tumult.

China’s CSI 300 stock index shed 0.1 per cent on return from an extended holiday on Thursday, while South Korea’s Kospi fell 0.2 per cent and Australia’s S&P/ASX 200 fell 0.2 per cent. Hong Kong’s Hang Seng index was the only major benchmark to notch any gains, up 1 per cent, while markets in Japan were closed for a holiday.

The falls in Asia came after US shares closed lower in response to comments from Powell, with the S&P 500 shedding 0.7 per cent and the tech-focused Nasdaq Composite dropping 0.5 per cent.

The Fed on Wednesday raised its benchmark interest rate by 0.25 percentage points to a range of 5 to 5.25 per cent, matching analyst expectations and marking the 10th consecutive rise since early 2022.

The central bank’s latest statement removed previous guidance stating additional monetary tightening “may be appropriate” and emphasised its policy approach would depend substantially on economic data.

But speaking to journalists after the rate rise, Powell said the central bank still expected inflation would take time to reach its target range. “We on the committee have a view that inflation is going to come down not so quickly . . . if that forecast is broadly right, it would not be appropriate to cut rates,” he said.

Analysts said the changes to the Fed’s regular statement could mark the end of the current tightening cycle. But while markets have priced in several rate cuts before the end of the year, opinions were mixed on the likelihood of imminent easing.

“Powell pushed back against the potential for rate cuts later this year given the committee expects inflation will move down at a slower pace than what markets anticipate, unless there is a material deterioration in the US economy,” said Tai Hui, a market strategist at JPMorgan Asset Management. “Hence, a slowdown, or even a mild recession, may not be sufficient to convince the Fed to reverse policy course soon.”

Ray Sharma-Ong, investment director for multi-asset investment solutions at Abrdn, said that banking sector issues — such as the recent failure of First Republic Bank — were unlikely to pose a systemic threat, but tightening credit conditions could weigh heavily on US growth and force the Fed to take supportive action.

“With the Fed’s forward guidance today indicating a strong shift towards data dependence, we expect the Fed to cut rates when a recession occurs,” Sharma-Ong said.

In commodities markets on Thursday, West Texas Intermediate, the US crude benchmark, initially fell as much as 7.2 per cent in Asia over concerns about a possible recession, only to reverse course and climb 0.3 per cent to $68.79 a barrel. Brent crude, the international benchmark, was up 0.5 per cent at $72.70.

Futures markets tipped the S&P 500 to open up 0.1 per cent later in the day, while the FTSE 100 was expected to shed 0.3 per cent when trading begins in London.