The U.S. Federal Reserve on Wednesday approved a third straight 75 basis point hike in interest rates in a bid to tackle white-hot inflation that has been plaguing the U.S. economy.
Just a few months ago, a massive rate hike that the market couldn’t comprehend raised the U.S. central bank’s benchmark lending rate to a new target range of 3%-3.25%. This is the highest level since the 2008 global financial crisis.
“If you compare this rate hike cycle with the last rate hike cycle since 1983, the Fed has never raised rates so much in such a short period of time,” said David Chao, global market strategist in Asia Pacific ex-Japan. ) in Invesco.
“Given the Fed’s ‘powerful and rapid’ rate hikes, it’s becoming increasingly difficult for the U.S. to avoid a recession,” he added.
Hong Kong pegged the value of its currency to the U.S. dollar, and to maintain that peg, the central bank also raised its benchmark interest rate by 75 basis points on Thursday.
Meanwhile, the Bank of Japan kept short-term interest rates at minus 0.1 percent on Thursday, maintaining its policy of trying to stimulate the economy. After the decision was announced, the yen fell to 145 against the dollar, hitting a fresh 24-year low.
Investor sentiment in the region has been affected by a number of other factors, including escalating tensions between the U.S. and China over Taiwan. The U.S. Navy and Canadian warships passed through the Taiwan Strait on Tuesday, two days after President Joe Biden said U.S. military personnel would defend Taiwan if Chinese forces were to launch an invasion of the democratically self-governing island.
“The geopolitical backdrop, the Chinese slowdown story, the potential for energy rationing in Europe, a strong dollar and a fragile domestic [US] Equity and housing markets point to a clear recession risk,” ING analysts said in a note on Thursday.
“More aggressive Fed rate hikes and tighter monetary conditions will only exacerbate the threat,” they added.
— Emi Jozuka, Junko Ogura, Kathleen Benoza in Tokyo contributed to this report.