Central banks across Asia surprised markets with interest rate cuts Aug. 7, raising the pressure on Federal Reserve Chair Jerome Powell to follow suit.
The Reserve Bank of New Zealand delivered a larger-than-expected 50-basis-point cut and kept the door open for further easing; the Reserve Bank of India implemented an unconventional 35-basis-point cut on key rates; and the Bank of Thailand defied market expectations by lowering its policy rate, citing concerns over weak economic growth and a strong currency.
Bond yields tumbled across the region, as did that on the 10-year U.S. Treasury note, shedding 5 basis points to 1.65%.
"The surprise rate action from the RBNZ can only spur the expectations of a similar size cut from the Federal Reserve," Ipek Ozkardeskaya, a senior analyst at London Capital Group, wrote in a research note.
The Fed lowered its benchmark interest rate by 25 basis points on July 31 as part of a "mid-cycle adjustment," dashing expectations from some traders — and President Donald Trump — who had been looking for signs there will be further easing this year. However, Powell did not shut the door on further easing as he noted that the central bank will "act as appropriate to sustain" the U.S. economic expansion.
Lower yields around the world may risk inflating the dollar unless the Fed also loosens monetary policy further. Futures markets are predicting 75 basis points of rate cuts this year, according to CME Group's FedWatch Tool, while analysts expect more cuts elsewhere in the coming months.
Fourteen of the 37 central banks tracked by the Bank for International Settlements have already lowered rates in 2019, while just three — Argentina, the Czech Republic and Norway — have tightened policy. This marks a big shift from 2018, where stronger growth enabled 19 central banks to end the year with higher rates, whereas just five cut them.
"The dollar is strengthening despite depressed U.S. yields. This supports our belief that as bad as things might get in the U.S., the rest of the world will be even worse off," Win Thin, global head of currency strategy at Brown Brothers Harriman, wrote in a research note.