Asian markets with strong policy support stand to gain as Fed defies Trump’s demand to cut rates

[SINGAPORE] The US Federal Reserve’s decision to defy President Donald Trump’s demands by keeping interest rates unchanged for the fifth straight time was broadly in line with market expectations.

But analysts say that Asian markets with strong policy support may fare better in weathering a storm of uncertainties whipped up by factors such as elevated US yields and a resilient greenback.

Most Asian markets were in the red on Thursday (Jul 31), following the Fed’s decision to hold interest rates steady. Despite Trump’s relentless pressure, the US central bank kept the benchmark rate at between 4.25 per cent and 4.5 per cent on Wednesday.

The latest policy decision was made with a 9-to-2 vote, which passes for a split outcome at the consensus-driven central bank, with two Fed governors dissenting – the most since 1993.

Fed chair Jerome Powell stressed that the central bank remains focused on controlling inflation, not on government borrowing or home-mortgage costs that Trump wants lowered.

He added that the risk of rising price pressures from the Trump administration’s trade and other policies remains too high for the Fed to begin loosening its “modestly restrictive” grip on the economy until more information is collected.

In Asia, South Korea’s Kospi closed 0.3 per cent lower, Hong Kong’s Hang Seng Index lost 1.6 per cent, and China’s Shenzhen Component Index retreated 1.7 per cent. 

Singapore’s Straits Times Index was also down, declining by 1.1 per cent.

Bucking the trend was Japan’s Nikkei 225, which gained 1 per cent, after the country’s central bank announced that it would keep its rates unchanged.

Wall Street had ended largely flat on Wednesday, following the Fed rate decision, with the S&P 500 index slipping 0.1 per cent.

Strong policy support

Ray Sharma-Ong, South-east Asia head of multi-asset investment solutions at Aberdeen Investments, prefers Asian markets with strong policy support amid the uncertainties.

“China stands out,” he said, highlighting the nation’s robust policy toolkit, which includes monetary easing, fiscal support and targeted stimulus to offset the negative impacts of tariffs.

The Chinese equity market, he added, is also supported by a multipronged programme aimed at boosting investor confidence and improving market liquidity.

He also cited South Korea for presenting “attractive opportunities”, in the form of its growth-oriented reforms, financial market liberalisation and improving corporate governance.

He added that the country’s commitment to regulatory alignment and negotiation with the US to avoid a 25 per cent tariff could help preserve trade competitiveness and investor sentiment.

Kerry Craig, global market strategist at JP Morgan Asset Management (JPMAM), said that there was little in the latest Fed decision that alters the asset manager’s market outlook.

Despite the impacts of tariffs and rising inflation, JPMAM favours quality across equities and fixed income, as well as relative value opportunities outside the US, including Europe, Japan and the emerging markets.

“The delayed impact from fiscal policy will lift growth in 2026, and the impact of trade policy on inflation will also start to ease next year, allowing for further policy easing,” he added.

Within the Asean markets, the impact is broadly neutral, said Zane Aw, senior research analyst at Phillip Securities Research.

He noted that in Singapore, the central bank on Wednesday maintained the prevailing rate of appreciation on the Singapore dollar nominal effective exchange rate policy band.

He said that there could be a divergence in performance among the Asean markets, with relatively more resilient economies such as Singapore potentially attracting stable inflows.

Others, however, could face headwinds from ongoing domestic political instability and continued uncertainty over US tariffs, he said, citing Thailand.

Sharma-Ong took a more positive stand on the kingdom. Despite the geopolitical tensions, the Thai equities market could gain near-term relief due to its strong export base, improving domestic demand and tariff negotiations with the US, he said.

Wait-and-see approach

While Powell did not rule out the possibility of a future rate cut in his latest remarks, he did not commit to one at the next Federal Open Market Committee (FOMC) meeting in September.

Responding to questions from the media, he emphasised that the Fed would take a “wait-and-see” approach, even though both the central bank and external forecasters expect a “meaningful amount of inflation” to arrive in the coming months.

With only three more FOMC meetings left this year, most analysts are anticipating cuts in December.

“Tariffs will likely put upward pressure on inflation data in the months ahead, and without clear signs of labour market stress, we expect policymakers will remain patient about resuming rate cuts,” analysts from Nomura said.

Describing the FOMC press conference as “hawkish”, the financial services group expects the rate to be held until December.

Similarly, Craig from JPMAM expects the rate cut to happen only in the final month of the year. He noted that the market interpretation of the FOMC outcome was “more hawkish than expected”, citing the reaction in the bond market as yields ticked higher.

While the asset manager still expects the Fed to ease policy in 2025, the conditions for a September cut “appear high and may need a material deterioration in the labour market”, as well as “the unintended economic consequences of policy decisions (that will not be) fully felt until later in the year”, Craig said.

However, DBS chief economist Taimur Baig believes that the chance of interest rates being cut in September is no more than “50-50”. “Tariff-related uncertainty may not dissipate, but will likely decline somewhat by then, in our view,” he said.

For the Fed to cut rates, it would need to see material weakness in the labour market, along with a continuation of well-behaved inflation out-turns, he added.

Alvin Liew, senior economist at UOB, took a different stance, believing that the US central bank would resume its rate cuts. He expects the Fed to hold three 25-basis-point cuts this year, carried out over the remaining FOMC meetings in September, October and December.

This will bring the upper bound of the federal funds target range to 3.75 per cent.

He added that UOB expects two rate cuts in 2026, implying a lower terminal federal funds target rate of 3.25 per cent for the year.