The Federal Reserve gave a “Goldilocks” gift! Asian assets welcome the favorable trend under a two-pronged approach of “easing signals” and liquidity

The Zhitong Finance App learned that the results of the Fed's policy meeting on Wednesday fell short of hawkish expectations in the market, and that the Federal Reserve announced the monthly purchase of 40 billion US dollars of short-term treasury bonds starting December 12, which will bring relief to the Asian market to a certain extent and boost various types of assets. Analysts pointed out that Asian currencies are expected to benefit from the weakening US dollar. In the context of the Federal Reserve injecting liquidity, short-term bonds and high-grade credit bonds will benefit, as will cyclical stocks and exporter stocks.

Here are comments from some market watchers.

Nick Twidale, chief analyst at AT Global Markets, said:

“I think after the Federal Reserve cuts interest rates as scheduled and the US market rebounds, it is only natural that the Asian market will start with a positive attitude today. But I have reservations about how much sustained momentum last night's interest rate cuts could bring to the global market, because the forward-looking guidance is probably more dovish than most investors would like. I think as the market digests Powell's statement, we may see some fairly volatile market conditions in the next few trading days.” “As far as the market is concerned, it feels like the Fed and Powell have taken a very 'middle path' decision. Overall, I think this is slightly hawkish because the Federal Reserve suggests that it will cut interest rates again in 2026, and the market expects at least two more times. But they have left such room for policy openness, which is why we will see market shocks in the next few days.”

Takashi Ito, senior strategist at Nomura Securities, said:

“The successful conclusion of the FOMC meeting without major concerns, combined with an increase in the 2026 GDP forecast and a reduction in the inflation forecast, is positive for the stock market. In Japan, this has provided a smooth wind for auto stocks, and housing-related stocks may also attract buying interest over time.” “The improved outlook for the US economy shown by the FOMC also makes it easier for the Bank of Japan to decide to raise interest rates and allows the market to better predict Japan's monetary policy, which is also positive for the market.”

Rinto Maruyama, interest rate strategist at Sumitomo Mitsui Nikko Securities, said:

“The market is betting that the Federal Reserve will cut interest rates further because even Powell, who is optimistic about the economy, hinted that it will cut interest rates again. This also stems from Trump's criticism that the Federal Reserve should have cut interest rates by 50 basis points, and rising expectations that Kevin Hassett may become the next chairman of the Federal Reserve.” “As US interest rates fall, multiple currencies are likely to strengthen against the US dollar. In addition to interest rate prospects, many investors are increasingly concerned about the independence of the Federal Reserve. As Trump continues to put pressure on central banks, the Federal Reserve is likely to cut interest rates while ignoring concerns about inflation. This could drive up inflation expectations and weaken confidence in the dollar — a subject that could dominate the market next year.”

Tomo Kinoshita, global market strategist at Invesco Asset Management Japan Ltd., said:

“The combination of increased growth expectations and softened inflation forecasts raised market expectations for the Fed to cut interest rates, boosted the rise in US stocks, strengthened expectations for a more drastic interest rate cut in 2026, and lowered the long-term yield of the United States.” “In Asia, I expect the stock market to take a positive tone and the currency to appreciate. Export-oriented stocks should benefit from improved US growth prospects, and the market believes that the Federal Reserve is leaning more towards easing, which may be seen as a supporting factor for the Bank of Asia to cut interest rates. This, in turn, may provide a tailwind for domestic demand-related stocks.”

Masayuki Koguchi, Executive Chief Fund Manager of Mitsubishi UFJ Asset Management, said:

“Interest rate cuts are not as hawkish as expected and have lowered long-term interest rates in the US. This decline may also be transmitted to long-term interest rates in Japan.” “However, opinions on future interest rate cuts and economic prospects remain divided. US economic indicators are unclear. This result reflects the difficulty of predicting whether future positions will be hawkish or dovish.”

Phillip Wool, head of global research at Rayliant Global Advisors, said:

“I think this is slightly beneficial to the yen, although the interest rate cut at this meeting and the Bank of Japan's interest rate hike on December 19 have largely been priced by the market, so I don't expect large fluctuations.”

Yuya Yokota, a foreign exchange trader at Mitsubishi UFJ Trust Bank, said:

“The FOMC was not as cautious about future interest rate cuts as feared, and its announcement to buy new short-term treasury bonds came as a surprise, causing the dollar to be sold off. The focus now is on whether the exchange rate of the yen against the US dollar will fall below the 156 yen mark and there will be buying, although the upside is limited around the 157.50 yen range.”

Christopher Wong, strategist at OCBC Bank of Singapore, said:

“The results of hawkish interest rate cuts have long been fully anticipated and digested by the market (because dovish expectations have been cut). Therefore, the market reaction after the resolution was positive for non-US currencies. Given that the FOMC risk did not bring any major surprises, we should expect Asian currencies to be supported, but further momentum for the dollar may depend on next week's US CPI and non-farm payrolls data.” “As the Bank of Japan is likely to raise interest rates next week and FOMC risks subside, the yen is likely to find some support. However, any meaningful rebound in the yen requires not only the Bank of Japan to follow tougher guidance, but also for policymakers to show fiscal prudence while the US dollar remains weak. If the USD/JPY exchange rate falls below the 155.70 level, then the bulls may have more courage to push the exchange rate down to 154.40 again.”

IG Australia market analyst Tony Sycamore said:

“The results of the hawkish FOMC meeting that fell short of expectations were obvious. The US stock market, gold, and silver rebounded strongly, while volatility indices and yields plummeted. We expect that these trends will now generally continue until the end of the year. Starting today's Asian session, regional stock markets are expected to be in full swing.”

Dilin Wu, research strategist at Pepperstone Group Ltd., said:

“I think the most immediate and obvious beneficiaries are short-term Asian bonds and high-grade credit bonds. When the Federal Reserve injects liquidity at the front end, dollar financing conditions immediately become less tight, which usually lowers short-term yields across the region.” “Asian currencies will also receive some support due to the weakening dollar, but South Korea and Japan are still exceptions. For the stock market, I think the beneficiaries will be selective. Cyclical stocks and exporters tend to respond first to looser short-term financing and a weaker dollar, but financial stocks are in a more complicated situation — cheaper capital helps demand for loans, but a flattening yield curve limits room for profit margins to rise. In other words, this isn't a full-blown stock market rally — it's a story of sector rotation.”

Felix Ryan, ANZ Group strategist, said:

“In the short term, the Australian dollar exchange rate against the US dollar may stabilize after the FOMC decision, but this does depend on the November Labor Force Survey data to support the RBA's more cautious view of monetary policy. In addition to local developments, the AUD/USD exchange rate still depends on global sentiment and the development of risk assets to stay above 0.66 — although expectations of the FOMC's further easing of policy are in contrast to the more hawkish outlook for the Reserve Bank of Australia, this can of course keep the AUD/USD exchange rate close to the current level for the time being.”

Brendan McKenna, an emerging markets economist and forex strategist at Wells Fargo, said:

“I expect Asian emerging market currencies to catch up with the overall rise in emerging markets we saw during the New York session. The hawkish interest rate cuts previously anticipated by many market participants have not been realized. Coupled with larger treasury bond purchases, this should put further depreciation pressure on the dollar.” “I think the strength of Asian emerging market currencies will be widespread, but high-beta currencies like the won and Indonesian rupiah are likely to perform better. The won has always been a bit behind, so the valuation there looks more attractive and may bring more room for growth. There is a similar situation with the Indonesian rupiah.” “Asia is likely to experience both a reassuring rebound and a sustained rise. I'm relieved that the hawkish interest rate cut scenario was avoided, but I think the continued depreciation of the US dollar and the rebound in emerging market currencies may be due to Powell opening the door to more interest rate cuts in 2026. What he conveyed was data dependency, but when he was asked many times if the easing cycle was over, Powell did not say that interest rate cuts were over.”

Hebe Chen, senior market analyst at Vantage Markets in Melbourne, said:

“The Federal Reserve brought an essentially 'Golden Girl' outcome to the Asian market — a hawkish cut in interest rates, relaxed financial conditions, while quietly shifting expectations from a pure cycle of interest rate cuts to a broader economic recovery narrative. This new balance should support risk appetite across Asia. Lower yields will boost stocks and currencies, and give regional central banks more breathing room.” “But the message is just as clear — this is a controlled normalization rather than full release, and Asian assets will remain highly sensitive to any data that challenges the Fed's optimistic 'inflation is transient' statement.”

Yujiro Goto, chief foreign exchange strategist at Nomura Securities, said:

“Only two FOMC members voted to keep interest rates unchanged. The participants' outlook still favors interest rate cuts, and the decision to buy short-term government bonds helped 'avoid the hawkish shift in market expectations'. This indicates that the USD/JPY exchange rate may face resistance on the upward side before the Bank of Japan meeting next week.”

Powell Hawk falls short of expected+ “mini QE”

The Federal Open Market Committee of the Federal Reserve cut interest rates as scheduled on Wednesday and decided to lower the federal funds rate by 25 basis points to the 3.5%-3.75% range with a 9-3 vote. The committee also fine-tuned the wording in the statement, implying that there is greater uncertainty about when to cut interest rates in the future.

Powell said at a press conference after the interest rate decision was announced that the current policy adjustments will help stabilize the weakening labor market while maintaining sufficient austerity conditions to suppress inflation. He said, “As the impact of tariffs gradually subsides, this further policy normalization should support employment and reduce inflation back to the 2% target.”

Regarding inflation, Powell stressed that the current inflation rate exceeds the Fed's 2% target mainly due to the Trump administration's increase in import tariffs. He reiterated that the impact of tariffs on inflation may only be a “one-time increase in prices.”

Powell said that since September, the adjustment of the Commission's policy position has kept it within neutral expectations, which enables them to better determine the extent and timing of further policy interest rate adjustments based on the latest data, changing economic prospects, and risk balance.

Powell pointed out that in the Federal Open Market Committee's economic forecast summary, participants separately assessed the appropriate path for the federal funds rate in the most likely economic scenario. The median forecast for the federal funds rate at the end of 2026 is 3.4%, and the end of 2027 is 3.1%, in line with the September forecast. However, these predictions are uncertain and are not the Committee's plans or decisions. Monetary policy is not a predetermined course; they will make decisions based on the specific circumstances of each meeting.

Although the Fed's forecast for 2026 interest rates means that it will cut interest rates once by 25 basis points, traders are still betting that the Fed will cut interest rates twice next year. Currently, the Fed is expected to cut interest rates once each in June and the fourth quarter of next year.

Furthermore, more importantly, the Federal Reserve announced a key liquidity management measure, purchasing 40 billion US dollars of treasury bonds every month starting December 12 to rebuild banking system reserves, which declined sharply during the downsizing period. The statement pointed out that as balance sheet (QT) reductions have progressed previously, reserves have fallen to the “lower limit of an adequate level”, so it is necessary to “continue to maintain an adequate supply of reserves” in the future by purchasing short-term US bonds. The volume of purchases is expected to remain high for a few months before shrinking significantly.

The Federal Reserve stressed that this move is entirely reserve management and does not mean restarting quantitative easing (QE). Unlike the nature of policies that depress long-term interest rates and stimulate the economy during the crisis, this round of operations mainly targets the stable needs of the capital market.

Although the Federal Reserve stated that this move was not quantitative easing, for the market, the Fed's re-becoming a “net buyer” of bonds is a sign of improved liquidity, and improved liquidity is the “fuel” driving asset prices.