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ASIA MARKETS: Shares Extend Decline Amid Concerns Over Fed Tightening

Monday,   24-Jan-2022   09:49 AM (IST)

Asian shares declined, adding to last week’s losses, as investors prepared for the U.S. Federal Reserve to signal a liftoff in interest rates and lay the foundation for reducing its balance sheet. Stocks declined 1.8% in South Korea, 1.2% in Hong Kong, 0.8% in Japan, and 0.5% in Australia. Chinese equities were little changed. The FTSE Bursa Malaysia KLCI Index dropped 0.3% 1,521.82, led by RHB Bank and Genting. Futures on the S&P 500 Index were higher after the gauge suffered its worst weekly fall in almost two years. On Wednesday, economists expect the Fed to signal that it will increase interest rates in March to tame high inflation. The U.S. central bank is also likely to provide more details on its plans to reduce the balance sheet. Economists reckon that the March rate hike is likely to be the first of four quarter-percentage rate increases the Fed will deliver this year. The Fed’s policy decision this week comes amid an inflation outlook that has been worsened by the Omicron coronavirus mutation. Mobility restrictions and localized lockdowns prompted by the strain are expected to worsen the supply imbalance. The rapid improvement in the U.S. labor market has made it more likely that the Fed will be more aggressive in combating inflation. While Fed futures have discounted four rate hikes in 2022, a few economists reckon that the risk is that the central bank could increase borrowing costs more and consider an earlier beginning to the balance sheet runoff. Goldman Sachs said there was a risk that the Fed will want to take tightening action at every meeting until the picture on inflation changed. A few economists say that the Fed, at this week’s meeting, could further accelerate its tapering of bond purchases. Economists at ING Bank are of the view that the Fed could announce an immediate conclusion to the asset purchase program. At the December meeting, the Fed has already increased the taper pace, putting it on course to conclude in March. The 10-year U.S. yield was a tad higher at 1.78% and the dollar index rose to 95.70. Asian currencies were mixed. The Thai baht dropped, the Malaysian ringgit and the Chinese yuan were a tad higher, while the South Korean won was little changed.