Eyes on Fed’s rate decision as China fears dent sentiment

TOKYO

Debate is swirling around how big an expected U.S. interest rate cut will be this week, while market sentiment is being dragged by worries about the Chinese economy.

The yen edged to a new high since December ahead of the Federal Reserve decision on Sept. 18 and a policy meeting at the Bank of Japan two days later.

Data showing U.S. inflation slowed more than expected last month to its weakest pace since February 2021 has sparked fresh talk that Fed officials will announce a bumper 50-basis-point cut and continue easing into the new year.

However, while bets on such a move have risen, some analysts warned that it could send a signal that decision-makers are worried about the economy, particularly after two readings showing the labor market was softening.

While bank officials have played their cards close to their chest, they have hinted that they are willing to discuss a bigger cut, while former New York Fed chief Bill Dudley said he thought "there's a strong case for 50."

Michael Krautzberger at AllianzGI said: "The Fed, like other central bankers, are now focused on economic growth rather than inflation risks and becoming increasingly worried about being behind the curve on policy, cutting rates too late to avert a recession or sharper growth slowdown.”

"Therefore, in our view, the risks of larger rate cuts at subsequent meetings this year cannot be discounted, especially if labour market activity deteriorates faster than currently expected and inflation continues to head towards target,” he said. 

Traders are keeping tabs on developments in China after more weak data on credit, retail sales, industrial production and house prices stoked concerns about the state of the world's number two economy.

The figures "collectively add to concerns that policy measures announced in recent weeks and months have so far failed to have any measurable impact in lifting economic growth thus far in the third quarter after the weak second quarter performance", said National Australia Bank's Ray Attrill.

He added that investors will be keenly watching the government's upcoming Politburo meeting, the date of which has yet to be set.

In light of the latest batch of disappointing figures, the central bank outlined plans to support the economy, saying it will "make maintaining price stability and pushing for the mild rebound in prices an important consideration for monetary policy and meet reasonable financing demand for consumption in a more targeted way."

The Fed's decision is set to be followed by the BoJ on Friday, with most analysts expecting it to hold rates after a surprise hike at the end of July sparked turmoil on markets.