Most stocks rise on Fed rate cut hope but strong yen batters Tokyo

Most equity markets rose Thursday after the Federal Reserve indicated a potential interest rate cut next month. However, Tokyo's Nikkei tumbled due to a stronger yen following a rate hike by the Bank of Japan.

US Federal Reserve Chairman Jerome Powell stated that policymakers were becoming increasingly confident that inflation and the economy were at a stage where they could start easing monetary policy. After a closely watched two-day meeting where borrowing costs remained at 23-year highs as expected, Powell told reporters that the first rate cut could happen "as soon as" September if economic data continued to improve.

"The broad sense of the committee is that the economy is moving closer to the point at which it will be appropriate to reduce our policy rate," Powell said, noting a "really significant decline in inflation."

His comments came after several reports suggested that prices were being brought under control and the labor market was softening. Powell also mentioned to lawmakers earlier this month that inflation did not need to hit the Fed's two percent target before a rate cut could be considered.

Traders are now fully expecting a rate reduction in September, with almost two more cuts anticipated before the end of the year.

"We continue to expect that the Federal Reserve will cut rates in September and December, followed by four 25 basis point reductions in 2025," said Raisah Rasid of JP Morgan Asset Management.

However, Rasid also issued a cautionary note: "Investors should be mindful of potential risks, which at times are underestimated, including the possibility of a sharper growth deceleration and the impact of geopolitical uncertainties on the growth backdrop."

Jeff Klingelhofer of Thornburg Investment Management echoed this sentiment, stating, "The market is assuming a September cut is a 100 percent certainty, but this is wrongheaded. There are still two inflation prints before September, so one bad piece of data could derail efforts."

The prospect of lower US borrowing costs in about six weeks sent Wall Street's three main indexes surging, with most of Asia following suit. Markets in Hong Kong, Shanghai, Sydney, Seoul, Wellington, Taipei, Manila, and Jakarta all saw gains.

In contrast, Tokyo's Nikkei fell more than three percent at one point as export-reliant firms were hit by the stronger yen. The Japanese currency soared Wednesday, building on a rally in recent weeks, after the Bank of Japan raised rates and outlined plans to wind down its bond-buying program, which has helped keep borrowing costs at extremely low levels.