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Global stocks and emerging market currencies sank on Thursday after the US Federal Reserve indicated it would cut interest rates more slowly next year to guard against any renewed threat of inflation.
The quarter-point reduction in rates that the Fed delivered on Wednesday, at its final meeting before president-elect Donald Trump takes office next month, was overshadowed as officials trimmed projected cuts in 2025.
Signs the Fed remains concerned over lingering inflation sent European and Asian stocks lower, following a steep sell-off on Wall Street on Wednesday, as investors were jolted by the prospect the Fed would reduce borrowing costs less rapidly.
Europe’s benchmark Stoxx 600 fell 1.5 per cent and the FTSE 100 lost 1.4 per cent on Thursday after markets in India, Japan, Korea and Hong Kong closed in the red.
Meanwhile, the dollar index, a gauge of the US currency against six peers, was trading around its highest level since November 2022.
The Indian rupee fell to a record low of Rs85.1 against the dollar. The Chinese renminbi slid, while South Korea’s won sank to a 15-year low. The Brazilian real lost 2.9 per cent.
“The rates backdrop from the US Fed is going to put even more pressure on emerging markets”, said Robin Gilhooly, senior emerging markets economist at Abrdn. “It will be a tough start to next year for emerging markets . . . but the contours of US policy won’t become clear for a while.”
Concerns about inflation stalling above 2 per cent contributed to Fed officials forecasting just half a percentage point worth of cuts in 2025, down from the full percentage in their last projections in September.
In volatile trading late on Wednesday, the S&P 500 index closed down 2.9 per cent and the tech-heavy Nasdaq Composite fell 3.6 per cent. Many of the biggest winners in a powerful 2024 equities rally pulled back.
In bond markets, the yield on the benchmark 10-year Treasury rose another 0.04 percentage points to 4.54 per cent. The rate-sensitive two-year yield dipped 0.03 percentage points to 4.33 per cent after rising 0.11 percentage points.
“The narrative has shifted from inflation in abeyance and downside growth risks, to the Fed acknowledging the economy is in a ‘really good place’ and seriously questioning how much further rates need to be cut after all,” said Chris Turner, global head of markets at ING.
Across Asian equity markets, Australia’s S&P/ASX 200 was down 1.7 per cent, South Korea’s Kospi closed down 2 per cent and India’s Sensex weakened 1.2 per cent.
Meanwhile, Japan’s currency-sensitive Nikkei 225 index was down 0.7 per cent after the Bank of Japan opted to hold rates steady on Thursday.
“Markets were surprised by the perceived hawkishness of the Fed,” said Mitul Kotecha, head of emerging market macro strategy at Barclays in Singapore.
Bitcoin, which tumbled more than 5 per cent on Wednesday, recovered by 1.6 per cent to $102,502 on Thursday.
“Given the risk of resurging inflation from potential trade tariffs and a slowdown in immigration that has been cooling pressure in the labour market, market expectations of only two more cuts in 2025 now seem reasonable”, said Jean Boivin, head of the BlackRock Investment Institute.
