Powell is right to be cautious on rate cuts
- Interest rates can be expected to come down this year, if not as quickly as the most bullish people hoped
Falling inflation has fuelled hopes for a clear indication of a timetable for interest rate cuts. All eyes were on last week’s meeting of the rate-setting United States Federal Reserve. They were disappointed, despite the American economy’s strong performance.
As expected, the Fed held rates between 5.25 and 5.5 per cent for the fourth straight time. The Hong Kong Monetary Authority and commercial banks led by HSBC followed suit, in line with the currency peg to the US dollar.
But Fed chairman Jay Powell moved to cool speculation it would begin cutting rates from a 23-week high in March. This was not the “base case”, he said. The central bank needed greater confidence inflation was sustainably lower. He did not expect that to happen by its March meeting.
As a result many in the market turned out to be unrealistically hopeful about a rate-cut timetable. Powell’s more circumspect tone took them by surprise and sent US markets plunging in their worst day in months.
The Hong Kong market is an exception, with people putting a more positive spin on Powell’s comments. One reason may be that as Hong Kong’s economy has struggled to recover from a pandemic on top of social unrest, the local stock market has fallen so far it is now the world’s cheapest among major markets in price/ earnings terms.
Hong Kong banks hold rates steady as Fed keeps options open on cuts
People are using an unexpected opportunity to bargain hunt and were not immediately deterred.
Powell admitted the US economy’s robust performance since the pandemic despite repeated rate rises had confounded forecasts. But the Fed needed more evidence inflation would keep falling. He is right to be cautious.
Inflation is not to be taken lightly even when it appears to be in retreat. But the US economy is not falling into recession as a lot of people feared as the Fed raised rates. It now appears to be headed firmly in the right direction.
Interest rates can be expected to come down this year, if not as quickly as the most bullish people hoped. This should lead to a reversal of capital flows which saw Hong Kong Exchanges and Clearing’s main board fall to eighth last year in the global IPO table, from first in 2019.
A revival of an IPO market that raised US$40 billion from 144 IPOs in 2019 can only be good for the city’s future as a bridge to mainland China’s economy.
