Recent market trends have been volatile, and many are asking: when will the US finally cut interest rates? This question is on the minds of investors globally. Recent mixed US economic data has once again fueled market expectations for a dollar rate cut, but the Federal Reserve’s (Fed) stance remains ambiguous. Adding to the uncertainty, former President Trump’s policy direction could also be a key factor influencing the dollar’s trend. This game is becoming increasingly complex. From the perspective of a seasoned investor, this article will unravel the complexities, deeply analyze Fed policy and the Trump variable, and provide practical response strategies for investors in Taiwan, Malaysia, and other parts of Asia in the current situation.
Market expectations are not baseless; they are founded on a series of changes in economic data. Since the second half of 2024, although core inflation in the U.S. has cooled, it has consistently fallen just short of the Fed’s 2% target. This “sticky inflation” has made Fed officials hesitant to act rashly. On the other hand, the economic engine seems to be showing signs of trouble.
The current situation is quite interesting, like a tug-of-war. On one end is the still-strong labor market, with the unemployment rate at historic lows, giving the Fed the confidence to maintain high interest rates since the economy can still bear it. But on the other end, some leading indicators are flashing yellow. For example, recent retail sales data fell short of expectations, showing that consumers’ wallets are starting to shrink, and the manufacturing PMI is hovering around the boom-bust line. These are all signs of an economic slowdown. This data divergence is the main reason the market anticipates the Fed may need to implement a “precautionary rate cut” to avoid a hard landing.
Specifically, retail sales data for January unexpectedly declined, and industrial production also showed negative growth. This indicates that the high-interest-rate environment of the past year has begun to substantially curb demand in the real economy. Businesses face increased borrowing costs and are becoming more conservative with expansion plans; individuals are feeling the pressure of credit card bills and mortgages, naturally reducing their willingness to spend. As these cooling signals become clearer, the market will bet that the Fed’s policy will gradually shift from “fighting inflation” to “supporting growth,” with rate cuts being the most direct tool.
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Despite the market’s loud calls, the Federal Reserve, which holds the real power over interest rates, appears remarkably calm. Chairman Powell has repeatedly stated in public that policy will be “data-dependent,” and cutting rates too early could undo previous efforts to curb inflation. This caution is well-founded, as the “stagflation” of the 1970s is a nightmare for all central bankers.
Within the Federal Open Market Committee (FOMC), different voices exist. “Hawks” worry about the persistence of inflation and believe high interest rates need to be maintained for longer. “Doves,” on the other hand, are more concerned about the risk of an economic recession and think rates should be cut in a timely manner to provide support. Current decisions are a balance between these two viewpoints. Investors need to pay close attention to the minutes of each meeting to spot shifts in officials’ attitudes, which directly affects the forecast for the 2025 rate cut timing.
Want to know the market’s specific bets on interest rate futures? There’s a very useful tool: the CME FedWatch Tool. It displays real-time market predictions for the probability of rate hikes or cuts at each future FOMC meeting, based on trading data from federal funds futures. According to current data, the market widely expects the first rate cut to occur in the third quarter of 2025, with a total reduction of possibly 50 basis points for the year. Of course, this forecast is dynamic and will adjust with each new economic report.
Among all the variables in analyzing the dollar rate cut, Donald Trump is definitely the most unpredictable “wild card.” His policy proposals, especially regarding trade and tariffs, could completely disrupt the Fed’s existing plans and become a key factor influencing capital flows.
Trump has recently made it clear that if he returns to office, he may impose across-the-board tariffs on all imported goods and even higher punitive tariffs on specific products like automobiles and semiconductors. What does this mean? It means the global supply chain will face another shock, U.S. import costs will rise significantly, and this cost pressure will likely be passed on to consumers, thereby pushing up inflation. If this happens, not only will the Fed’s room for rate cuts be squeezed, but it might even be forced to reconsider rate hikes, which is completely contrary to current market expectations.
On the other hand, aggressive trade policies are bound to provoke retaliation from global trading partners, exacerbating geopolitical tensions. In this highly uncertain environment, market risk-aversion will spike. Interestingly, as the world’s primary safe-haven currency, the U.S. dollar might actually be sought after during turbulent times. Therefore, even if rate cut expectations exist, if Trump’s policies trigger a new wave of global risk aversion, the US Dollar Index (DXY) could find support, leading to a volatile trend.
Once the dollar rate cut finally happens, it will trigger a chain reaction across global financial markets. Simply put, when the dollar’s interest rate falls, capital will naturally seek higher returns elsewhere, leading to a reallocation of global capital flows.
Theoretically, a rate cut weakens the dollar’s appeal, causing the US Dollar Index (DXY) to fall. The DXY’s recent consolidation around the 106 level is partly because the market has already priced in rate cut expectations. However, as mentioned earlier, the dollar’s safe-haven status provides support due to uncertainties like Trump’s policies. Therefore, the future trend of the dollar may not be a one-way decline but rather a wide-ranging consolidation, torn between “rate cut expectations” and “safe-haven demand.”
When the dollar weakens, other major currencies have an opportunity to appreciate. The Euro and Japanese Yen will face appreciation pressure. For emerging markets like Taiwan and Malaysia, a dollar rate cut is generally good news. It means an increased likelihood of hot money inflows, which helps support local stock and currency markets. The depreciation pressure on currencies like the New Taiwan Dollar and Malaysian Ringgit will ease, and they might even experience a period of appreciation.
Faced with such a complex macroeconomic environment, how should we, as investors in Asia, respond? The key is to be flexible and develop investment strategies based on the characteristics of different markets.
Hong Kong operates under a linked exchange rate system, pegging the Hong Kong dollar to the US dollar. A US rate cut means Hong Kong’s market interest rate (HIBOR) will also fall, which helps reduce financing costs for businesses and individuals, providing good news for the recovering real estate and stock markets. As an Asian financial hub, Singapore’s economy is closely tied to global trade. A dollar rate cut will help improve the trade environment, and the Singapore dollar may appreciate modestly. The table below briefly analyzes the potential impact of a US dollar rate cut on several major Asian economies:
| Country/Region | Currency Impact | Economic Growth Potential | Market Reaction |
|---|---|---|---|
| Hong Kong | HKD remains stable | Pressure on property market eases | Improved stock market liquidity, generally positive |
| Singapore | SGD appreciates modestly | Improved trade environment | Stock market relatively stable |
| South Korea | Pressure on KRW depreciation eases | Export-oriented companies benefit | Stock market (especially tech stocks) benefits |
| Taiwan | NTD expected to rebound | Capital flows back to the tech sector | Stock market (especially electronics) attracts capital |
For investors in Taiwan and Malaysia, a dollar rate cut means that asset allocation needs adjustment. Consider moderately reducing the proportion of US dollar assets and increasing allocation to local markets or non-USD currency assets. For example, Taiwanese tech stocks and high-dividend ETFs benefiting from capital inflows, or Malaysia’s domestic consumption and raw materials-related industries, could be good choices. At the same time, be wary of the risk of trade friction that Trump’s policies might bring, and avoid putting all your eggs in one basket.
25 basis points means 0.25%. In finance, a “basis point” is the smallest unit of measure for interest rates, where 1 basis point equals 0.01%. So, when you hear the Fed is cutting rates by one-quarter or 25 basis points, it means the benchmark interest rate is decreasing by 0.25 percentage points.
Currently, no one can give a definitive answer, not even the Fed itself. The market generally expects it around the third quarter of 2025, but the final decision depends on future economic data. Investors should monitor two key indicators: 1. Whether inflation continues to move towards the 2% target; 2. Whether the job market shows significant cooling. Additionally, any major geopolitical events or shifts in Trump’s policy could affect the timeline of the Federal Reserve’s interest rate decisions.
Fed is short for the Federal Reserve System, which is the central bank of the United States. Its core duty is to set monetary policy with the goals of promoting maximum employment and maintaining stable prices. The Fed controls the economy through “rate hikes” and “rate cuts.” When rates are hiked, borrowing becomes more expensive, which helps curb an overheating economy and inflation but can negatively impact the stock market. When rates are cut, borrowing becomes cheaper, stimulating consumption and investment, which is usually positive for the stock market. Every decision by the Fed influences global capital flows, thereby indirectly affecting every investment you have in stocks, bonds, forex, and other markets.
In summary, the main theme of the 2025 financial market will revolve around the interplay of three major axes: the dollar rate cut, Fed policy, and Trump’s policies. The direction of U.S. economic data will be the foundation for when the Fed acts, while Trump’s trade policies are like a ticking time bomb that could change the rules of the game at any moment. For investors, this is a period full of challenges and opportunities. While focusing on the liquidity benefits of rate cuts, it is even more crucial to be vigilant about the risks of rising trade protectionism. Maintaining a flexible and diversified investment portfolio and closely monitoring macroeconomic data are the keys to navigating these waves steadily. Only by being fully prepared can one seize opportunities in a changing landscape.
