【MACRO Alert】The Fed's "hawkish rate cut" policy forces emerging market central banks to actively re

In its recent policy meeting, the Federal Reserve unexpectedly showed a hawkish stance, a shift that occurred three months after it slashed interest rates by 50 basis points to "fend off a recession." Financial blog Zero Hedge questioned this, pointing out the Fed's unusual behavior of turning from an extremely dovish to a hawkish stance in just three months, and questioned whether this decision was another catastrophic policy mistake.

The Fed's hawkish rate cuts have raised questions about its policy consistency. Steve Englander, a foreign exchange strategist at Standard Chartered Bank, suggested that if the Fed is really leaning towards hawkishness, then the previous rate cuts would be redundant.

Goldman Sachs economist Manuel Abecasis pointed out that the job search rate of unemployed workers has fallen by 7% since September to 21%, the largest two-month drop in history and the lowest proportion since 2014. This trend may indicate that the unemployment rate is about to rise more significantly, which is consistent with the situation that the labor market will loosen significantly in 2024 and "has not yet stabilized."

The market reaction was swift and powerful: the dollar surged to a two-year high, stocks plunged, and Treasury yields soared. Fed Chairman Powell said at a press conference that monetary policy is now "significantly less restrictive" and "clearly closer to neutral." Policymakers sharply raised their median inflation forecast for 2025 from 2.1% to 2.5%, again raised their forecast for the long-term neutral interest rate to a six-year high of 3.0%.

The adjustments reflect the Feds heightened concerns about inflation, while leaving little change in its forecasts for economic growth and the labor market, which are expected to remain strong through 2026. Torsten Slok, chief economist at Apollo Global Management, said he now believes there is a 40% chance the Fed will raise rates in 2025.

The Feds policy shift and the strengthening of the U.S. dollar have had a huge impact on emerging market currencies, forcing central banks to respond. The Indonesian rupiah, Indian rupee, Japanese yen, Korean won and Brazilian real have all fallen to multi-year or historic lows, and central banks have taken action to stabilize their currencies.

. The rupiah fell to a four-month low against the dollar as Bank Indonesia pledged to stabilize the currency in the event of excessive volatility.

. The Indian rupee hit a record low against the dollar as traders observed that the Reserve Bank of India may be selling dollars to curb the rupee's depreciation.

. The Japanese yen depreciated by more than 300 points against the US dollar yesterday. Japan's Finance Minister and Finance Official said that "appropriate action will be taken in response to excessive fluctuations in the yen."

. The Korean won exchange rate fell to a 15-year low. South Korean financial authorities said they would relax foreign exchange regulations to improve liquidity; South Korea's National Pension Fund will implement foreign exchange strategic hedging.

. The Brazilian real continued to hit historic lows against the US dollar, performing the worst among emerging markets. The Brazilian Central Bank conducted multiple spot US dollar auction operations to "rescue" the exchange rate.

These actions reflect emerging market central banks concerns about the strength of the U.S. dollar and the challenges they face in protecting their currencies and economic stability. Rapid currency depreciation could exacerbate the impact of imported inflation on emerging markets and could also increase the cost of servicing external liabilities. Rapid currency depreciation could exacerbate the impact of imported inflation on emerging markets and could also increase the cost of servicing external liabilities.

Since the end of September, the MSCI Emerging Markets Currency Index has fallen 3.3%, the biggest quarterly drop in two years. The move came after the Federal Reserve forecast fewer rate cuts next year and signaled that inflation concerns are back in sight. Policymakers in developing markets are taking action as they expect the dollar to continue to strengthen. But fighting back against a stronger dollar comes at a cost, with monetary authorities having to use foreign exchange reserves to protect their currencies. Central banks are likely to continue working to reduce the volatility of their currencies and prevent large swings.

Against the current economic and political backdrop, the Fed's policy decisions will have a profound impact on global financial markets, and market participants need to remain vigilant to adapt to possible policy changes and economic trends. Emerging market central banks are also actively responding to the challenges posed by a stronger dollar, which further increases the complexity and uncertainty of global financial markets.