Morgan Stanley said the recent minutes show the Fed’s resolve to remain patient in determining when/how to kick off tapering. Hence, the rise in US real rates is unlikely to be as disorderly as in 2013
Mumbai: US Federal Reserve’s tightening of interest rates may not spell bad news for Asia, while a stronger US growth is likely to be positive for the region, according to Morgan Stanley.
In the Federal Open Market Committee (FOMC) meeting, the central bank had hinted at a rate hike cycle, sending global equities into a spin.
“The Fed's impending normalisation is not all bad news, in our view. We do not expect taper tantrum 2.0 and believe that Asia could benefit from stronger US growth without being hurt by rising US rates. The recent minutes show the Fed’s resolve to remain patient in determining when/how to kick off tapering. Hence, the rise in US real rates is unlikely to be as disorderly as in 2013. Also, Asia's improved macro stability vs 2013 reduces risks of disruptive rate hikes," said Morgan Stanley.
In the US, the change in the Fed’s dot plot got markets nervous about the possibility that the central bank has jettisoned its dovish flexible average inflation targeting framework and about the likelihood of taper tantrum 2.0. On the other hand, the People's Bank of China (PBoC) went in the opposite direction, from counter-cyclical policy tightening to counter-cyclical easing with an RRR (reserve requirement ratio) cut.
“The Fed’s policy matters for Asia not only in terms of what it says about the US growth environment and the spillover to Asia via trade linkages; it also has implications for Asia in terms of what it means for global liquidity conditions and external funding linkages," the global brokerage firm said.
The covid flare-ups in different parts of Asia, including China, highlight just how fluid the covid containment situation can be despite initial success. According to Ellen Zentner, US economist, Morgan Stanley the minutes of the FOMC meeting showed there is broad agreement that the rise of more contagious covid-19 variants is one factor keeping the outlook uncertainty elevated. The minutes also show the Fed’s resolve to remain patient in determining when and how to kick off tapering.
“When the Fed normalizes policy as US growth improves, Asia’s own macro stability is another factor which determines whether Asia benefits from stronger US demand or gets hurt by rising US rates," Morgan Stanley said.
It added that current key macro stability indicators have mostly improved versus 2013. However, it warns that bigger inflation risk lies in the US. “If US inflation overshoots 2.5% year-on-year on a sustained basis and US 10-year yields rise in a disorderly fashion, this could spill over to Asia via external funding and trade linkages," it said.