The US Federal Reserve on Thursday (early Friday in Hong Kong) announced its second interest rate cut of 2024, trimming its benchmark rate by a widely expected 0.25 percentage point amid cooling inflation and paving the way for Asian central banks to cut their own policy rates further in the coming months and into the next year.

The new rate cut lowers the bellwether federal funds rate to a range of 4.5% to 4.75% from its current 4.75% to 5%. The move is 25bp lower than the 50bp rate cut on September 18.

“Recent indicators suggest that economic activity has continued to expand at a solid pace,” says Fed chairman Jerome Powell in a press briefing. “Since earlier in the year, labour market conditions have generally eased, and the unemployment rate has moved up but remains low. Inflation has made progress toward the [Federal Open Market] Committee’s 2% objective but remains somewhat elevated.”

When asked what his message is for people who are not feeling the strength of the economy, Powell says: "The economy is performing well, but we also know that people are still feeling the effects of high prices, for example, and we went through, the world went through a global inflation shock, and inflation went up everywhere. And you know, it stays with you, because the price level doesn't come back down. So that takes some years of real wage gains for people to feel better. And that's what we're... that's what we're trying to create. And I think we're well on the road to creating that. Inflation has come way down. The economy is still strong. Wages are moving up, but at a sustainable level.” 

The rate cut happens just a day after the election of Donald Trump as the new US president, who will assume office on January 20 2025.

When asked during the Q&A whether he will resign if Trump asks him to, Powell says “no”, citing that “it is not permitted under the law”.

The relatively low level of inflation in most Asian economies is also expected to continue. China and Thailand, for example, have inflation rates below 1.0%. In the case of China (0.4%), it’s because of the economic slowdown, while in the case of Thailand (0.35%), it’s mainly due to lower energy prices and subdued domestic demand. The Philippines and Vietnam have inflation rates of around 3.4% each, and Singapore with 2.2%. India currently has the highest inflation rate at 5.0%.

However, the policy rate (interest rate set by the central bank) of each country is currently higher than their inflation rate. For example, the Philippines’ policy rate is around 6.25%, Thailand’s policy rate is about 2.5%, about 3% for Malaysia, close to 2.5% for China, and around 6.5% for India.

The difference between the inflation rate and the policy rate means the real interest rate in these Asian markets is very attractive for local currency fixed income investors.