By Ankur Banerjee
SINGAPORE (Reuters) – Asian stocks slid, bond yields rose and the dollar was perched near a two-year high on Thursday after the U.S. Federal Reserve cautioned it would ease the pace of rate cuts in the coming year and investors braced for a Bank of Japan policy decision.
The Fed cut interest rates on Wednesday as expected, but Chair Jerome Powell’s explicit references to the need for caution from here on sent U.S. stocks sharply lower, with Treasury yields surging and traders scaling back bets on rate cuts next year.
The Dow Jones Industrial Average plunged more than 1,000 points. [.N]
Asian stocks have taken the cue from Wall Street, with MSCI’s broadest index of Asia-Pacific shares outside Japan down 1%. Japan’s Nikkei fell 1.8%, while Australian shares slid more than 2%.
“I think we’re in a good place, but I think from here it’s a new phase and we’re going to be cautious about further cuts,” Powell said at a press conference.
U.S. central bankers now project they will make just two quarter-percentage-point rate reductions by the end of 2025, which is half a percentage point less in easing next year than officials anticipated as of September.
“The Fed was more hawkish than we anticipated but today’s shift in policy guidance plays right into our view of a long pause by the Fed at the start of 2025,” said Prashant Newnaha, a senior Asia-Pacific rates strategist at TD Securities.
“The most meaningful surprises were concentrated on the inflation projections. They reinforce higher for longer is back.”
The shifting expectation of Fed rate cuts lifted the dollar index, which measures the U.S. currency against six rivals, to its highest since November 2022 on Wednesday. It was last at 108.15 in early trading on Thursday. [FRX/]
Sterling was steady at $1.25835 ahead of the Bank of England policy decision later in the day where the central bank is expected to keep interest rates unchanged, despite signs of a slowing economy.
The yield on benchmark U.S. 10-year notes touched a seven-month high of 4.524% on Wednesday and was last at 4.51% in early Asian hours.
Tony Sycamore, market analyst at IG, said the outcome of the Fed meeting should not have come as too much of a surprise to investors who have watched the recent run of warm U.S. inflation and activity data.
“However, it has served as the catalyst to wash away some of the speculative excesses that flowed into risk assets, including stocks and Bitcoin, following the US election,” he said.
Bitcoin eased to $100,340 after dropping 5% on Wednesday after Powell said the U.S. central bank has no desire to be involved in any government effort to stockpile large amounts of bitcoin.
