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Why Asian Central Banks Are Sidestepping the Fed—For Now

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BGC's Ingram Sees Fed Shifting Dots in 2018

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For years, it’s been a somewhat predictable reaction: The Federal Reserve moves interest rates, and great volatility ensues in Asian stock, bond and foreign exchange markets. Rising U.S. rates have tended to lure investors away from Asia, while falling rates have fueled destabilizing flows of hot money into its higher-yielding assets. The consequence: Asian central banks got in the habit of moving interest rates in parallel with the Fed. But there’s some evidence that the correlation is breaking down, with several economists even suggesting that Asia’s central banks are decoupling from the U.S. -- at least for the time being.

Asia has taken in stride four U.S. rate increases since late 2015. Anticipation that the Fed will begin shrinking its humongous balance sheet (offloading some of the $4.5 trillion of securities it purchased after the global financial crisis) has also caused minimal disruption. Even with further U.S. tightening expected, some Asian monetary authorities have moved the opposite way: India, Vietnam and Indonesia all recently cut their key rates, and Thailand may follow suit. Japan is nowhere close to tightening monetary policy. China’s benchmark rates remain at record lows, as are those in Australia and South Korea. Only the Philippines, buffeted by a weakening currency, may need to hike rates.