Instead of changing interest rates this week, the Federal Reserve decided to change what the future looks like economically. Despite the Fed holding rates constant, the Fed did reduce their growth forecasts. When the Fed increased inflation expectations, the tariffs were presented as explanation by pointing to expected short-term impacts. In a move to manage economic stability, the Fed decided to reduce the pace of its quantitative tightening (QT).
The Hang Seng index is in free fall, primarily because of continuing tariff-related woes. Dropped more than 2% from yesterday and down another 2.40% from today’s open. This drop further highlights the susceptibility of Chinese markets to global economic turmoil, especially in the tech industry.
The Federal Reserve’s move to hold rates steady shows a prudent approach during a time of mixed economic signals. By downgrading growth forecasts, the Fed signals their awareness of the likelihood of future decelerating economic growth. At the same time, that upward inflation forecast revision reflects recognition of the risk that temporary, tariff-driven price increases will feed through to overall inflation.
As Fed officials have stated, tariffs can result in a short-term increase in inflation. They think these effects will be temporary. This position reflects a belief that the economy will be able to withstand these external shocks without damaging long-term effects.
As one component of that larger strategy, the Fed has decided to slow down the pace of QT. This move will help promote liquidity in the financial markets, as well as foster stronger economic activity and greater financial stability.
In Asia, Hong Kong’s Hang Seng index has for months been the hardest hit by the U.S.-China tariff thuggery, mirroring broader market fears. The index’s recent plunge underscores how sensitive, or at risk, Chinese technology stocks are to a global market selloff. Despite this volatility, analysts suggest that these stocks still have potential to narrow the performance gap with Nasdaq 100 stocks over the coming months.
This potential is more complicated by larger market forces at play. As John Maynard Keynes famously cautioned, if you’re in uncharted waters, you should steer carefully.
"It should not be a matter of tearing up roots but of slowly training a plant to grow in a different direction." – John Maynard Keynes
This feeling rings true in the hyper-connected world we’re living in today, where unexpected changes can trigger ripple effects far and wide.
The Fed’s recent policy moves are taking place against a backdrop of increasing developments in international currency markets. This recent weakening of the US dollar since the middle of January is potentially finding a bottom. This rising trend with repercussions on global trade dynamics can put pressure on precious currencies associated and pegged to dollar’s value.
Investors and analysts should take their own cautionary judgement in light of these developments. Organizations such as Swissquote Bank Ltd highlight that their reports cannot be construed as replacements for the proprietary research.