Asian Markets Going Strong, But Traders Exercise Caution Over Possibility of Rising Interest Rates

Most Asian markets rose on Wednesday (Jan 8), but traders remained cautious after Federal Reserve Chairman Jerome Powell reiterated that inflation was declining but that interest rates may need to rise more than expected to bring it under control.

A string of key data releases in recent months have suggested that the central bank's series of large hikes last year are starting to pay off, fueling hopes that the central bank will pause its tightening cycle and even lower borrowing costs by the end of the year.

However, a forecast-busting jobs report on Friday, which showed half a million new jobs were created in January, dealt a heavy blow to traders and fueled speculation that more increases were on the way.

And on Tuesday, Powell confirmed those fears, telling The Economic Club of Washington, DC that he saw 2023 to be a year of "significant declines in inflation", but it will only hit the Fed's 2 per cent target next year.

But he warned "we think we are going to need to do further rate increases", adding that the "labour market is extraordinarily strong".

"If the data were to continue to come in stronger than we expect, and we were to conclude that we needed to raise rates more... then we would certainly do that," he said.

The remarks were echoed by Minneapolis Fed chief Neel Kashkari, a dovish member of the Fed board, who stated that rates may need to rise from 4.5-4.75 percent to 5.4 percent, which is higher than markets are currently pricing in.

"When you have the likes of Neel Kashkari reiterating his belief of a Fed Funds rate of 5.4 per cent before a pause ... it would appear that once again US markets are indulging in wishful thinking when it comes to where rates are likely to go over the next 12 months," said CMC Markets analyst Michael Hewson.

Powell's remarks were also similar to those he made last Wednesday, following the bank's most recent policy meeting, which sparked an equities rally.

And Wall Street rose again on Tuesday.

"It will probably go down as a missed opportunity because (Powell) could have pushed back on what the market is pricing in," OANDA's Edward Moya said.

"Rate cut bets for next winter firmly remain intact and that should be an issue for a Fed trying to get inflation somewhere near target."