Despite rocky inflation, the US Federal Reserve (Fed) is sticking to its plan to cut interest rates this year. As expected, at the meeting on Wednesday, the central bank left its key interest rate at a high level of 5.25 to 5.5% but forecasts three interest rate cuts this year.

“With the Fed re-iterating its intention to cut rates three times this year, starting in June, along with plans to slow the pace of quantitative tightening (QT) in the next few meetings, we expect both front end and back end yields to moderate in the months to come,” said Ray Sharma-Ong, Investment Director of Multi-Asset at abrdn.

“With yields having scope to fall further from current levels, we expect higher yielding Asia credit to outperform. In addition to Bonds benefiting from fall in yields, this also benefits long duration equities, and regions with high exposure to Tech stocks. This would favour regions like Korea and Taiwan, and sectors like Asia REITs,” Sharma-Ong forecasts.

“Investors should not be too surprised with today’s announcement,” commented Kerry Craig, Global Market Strategist, J.P. Morgan Asset Management. “So far this year, the data continues to reflect a healthy labour market, good overall economic activity and inflation still on a downtrend, though it could take a bit longer to reach target. Importantly, there is still a clear bias to cut rates from the committee.”

“A moderately stronger US economy and falling rates should be a positive for Asian markets as any additional US demand will support the manufacturing cycle and a market that is still pricing rate cuts should lead moderate US dollar depreciation and easing currency pressures in Asian markets,” Craig opined.

As per BNP Paribas Asset Management (BNPP AM), the Fed’s monetary policy affects other central banks mainly through the exchange rate channel. “Given the divergence in growth momentum between Europe and the US, if the European Central Bank (ECB) cuts rates before the Fed does, the euro could weaken, which would likely constrain the ECB’s pace and frequency of interest rate cuts this year,” says Chi Lo, Senior Market Strategist, Asia Pacific at BNPP AM.