Last week, the US Federal Reserve announced another 25-basis-point cut to its policy rate as expected, its third consecutive cut since September. That takes the Fed funds rate to between 4.25 percent and 4.5 percent, a two-year low. Hours later, Taiwan’s central bank said it would keep its policy rate unchanged at 2 percent, the highest since December 2008.
Meanwhile, the Bank of Thailand maintained its policy rate at 2.25 percent, Bangko Sentral ng Pilipinas announced its third policy rate reduction of 25 basis points, the Bank of Japan voted to pause rate hikes again, the Bank of England maintained its policy rate at 4.75 percent and Bank Indonesia again extended its rate pause.
While all these moves were in line with market expectations, the US central bank paired its decision with a drastic conservative rate cut outlook. Fed officials penciled in just two rate cuts for next year, their “dot plot” chart showed, down from the four they projected in September. That suggests growing unease about US president-elect Donald Trump’s expected tariff hikes, tax cuts and immigration restrictions, as well as uncertainty around US inflation.
The move sent markets into a tailspin, with US stocks falling, US Treasury yields trending up and the US dollar index rising above 108, while all non-US currencies moved lower. In Taiwan, the TAIEX slumped for two straight days through Friday, down more than 650 points, while the New Taiwan dollar depreciated by NT$0.21 against the US dollar. Central bank Governor Yang Chin-long (楊金龍) said the Fed’s latest “hawk cut” was a “shock” to the market.
Given the uncertainties related to Trump’s incoming fiscal and trade policies, the market had anticipated the Fed to revise downward its number of rate cuts next year. However, the market was still taken aback by the reduction in cuts the Fed suggested in the dot plot. Therefore, until US inflation drops further or until Trump’s policy outlook becomes clearer, the Fed’s monetary policy next year could be between it cutting rates modestly and not cutting them at all.
Still, there are many unknowns about Trump’s tariff plans, such as which goods would be tariffed and how long those duties would last. Actual tariff adjustments are not expected to be implemented soon, as such adjustments generally require investigations, negotiations and grace periods to implement. Overall, “We still don’t know when the tariff policy will be implemented and how big it will be,” Bloomberg News quoted Yang as saying on Thursday at a news conference after the bank’s rate decision was announced. That reaction was likely shared by central bankers around the world.
Overall, the Fed has capped this year with a third consecutive rate cut, but signaled both caution and a slower rate-cut path ahead. The world is to enter the new year with a more data-dependent and cautious Fed. That being said, barring the Chinese central bank, the current external environment might be too volatile for central banks to embark on further monetary easing in the near term. While Yang last week gave no timeline for the central bank’s potential rate adjustment, there is no doubt that global developments following Trump’s inauguration next month and stabilization in the domestic property market would be key factors in the bank’s rate call next year.
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