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Economy

Fed cuts rate creating room for Asian central banks to act

Monetary easing begins to take hold as economies slow worldwide

A screen displays the U.S. Federal Reserve interest rates announcement as traders work on the floor of the New York Stock Exchange on July 31.   © Reuters

WASHINGTON/NEW YORK -- The U.S. Federal Reserve lowered its benchmark interest rate by 0.25 percentage point on Wednesday, marking its first rate cut in ten and a half years, as it sought to cushion the American economy from a global slowdown and trade tensions.

Fed Chairman Jerome Powell said the move was a "mid-cycle adjustment," rather than the beginning of a new phase of rate cuts, disappointing markets and inviting a frustrated tweet by U.S. President Donald Trump.

But the Fed's decision is likely to trigger a domino effect, with wide-ranging implications for central banks in the Asia-Pacific region, many of which have already preempted Wednesday's rate change with cuts of their own.

In May, Malaysia cut rates for the first time in three years, as did New Zealand and the Philippines.

The cuts have continued in June and July, with India slashing rates for three consecutive policy meetings, as well as Indonesia, South Korea and Turkey joining the cuts.

Amid concerns of a global slowdown, Asian countries had been contemplating monetary easing to prop up their economies, but were hesitant to do so fearing their currencies would weaken. The Fed's move on Wednesday creates an opening for those countries to act.

The Fed lowered its target range for the federal funds rate to between 2.00% and 2.25% on Wednesday, down from 2.25% to 2.5%. The 10 members of the Federal Open Market Committee voted 8 to 2 in favor of the rate cut, the first since December 2008.

The Dow Industrial Average dropped more than 470 points at one point, as Powell's comments deflated hopes for more rate cuts. The Dow closed 333 points lower at 26,864.27.

"What the Market wanted to hear from Jay Powell and the Federal Reserve was that this was the beginning of a lengthy and aggressive rate-cutting cycle which would keep pace with China, The European Union and other countries around the world," Trump tweeted Wednesday afternoon. "As usual, Powell let us down."

Economists are watching the Reserve Bank of India as it convenes its next policy meeting on August 7. If the RBI were to cut rates following the Fed's move, it would be doing so for the fourth time in a row. There is speculation that Indonesia, Malaysia and South Korea could further cut rates.

Many central banks at emerging economies worked to tighten monetary policy last year. But they are now changing tack on concerns of an economic slowdown. The International Monetary Fund in July predicted emerging economies will grow 4.1% in 2019 -- a 0.3 point decrease from April.

These countries need to keep interest rates higher than in the U.S. and other advanced economies to attract investors. The Fed cut gives them more room to lower rates.

The European Central Bank is expected to launch additional monetary stimulus as early as September. Bank of Japan Gov. Haruhiko Kuroda signaled Tuesday that he was open to further easing, saying that he wanted to "prevent risks ahead of time."

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