Markets across Asia faced downward pressure as investor sentiment tightened following the Federal Reserve’s latest policy decision, with a second consecutive rate cut and an end to balance sheet runoff scheduled for December 1. The moves, while easing inflation concerns, heightened fears over prolonged monetary easing and its impact on global capital flows.
- Federal Reserve reduced benchmark rate by 25 basis points to 4.00%-4.25% in October 2025.
- Quantitative tightening (QT) halted on December 1, 2025, ending the reduction of the $9.8 trillion balance sheet.
- Asia’s Nikkei 225, CSI 300, and KOSPI declined 1.1%, 0.8%, and 0.9% respectively on Friday.
- U.S. dollar index rose 0.7%, with the 10-year Treasury yield climbing to 4.35%.
- Markets are assessing implications of prolonged U.S. monetary easing on capital flows and emerging market stability.
- Asia’s central banks are adjusting policy outlooks amid growing divergence in global monetary policy.
Asian equity indices opened lower on Friday as investors reacted to the Federal Reserve’s latest policy stance, marking the second consecutive rate reduction in 2025. The Fed trimmed its benchmark interest rate by 25 basis points, bringing the federal funds rate to a range of 4.00% to 4.25%, citing a softening labor market and moderating inflation. The decision was accompanied by a formal announcement that the Fed would halt the reduction of its balance sheet—amounting to $9.8 trillion in assets—effective December 1, 2025. The shift in balance sheet policy has drawn particular attention, as the Fed’s quantitative tightening (QT) phase, initiated in 2022, had been a key factor in global financial conditions. With QT ending, markets now focus on whether the Fed will maintain the current policy rate for an extended period, increasing the risk of persistent liquidity in U.S. markets and potential capital outflows from emerging economies. Regional benchmarks reflected the shift: Japan’s Nikkei 225 fell 1.1%, China’s CSI 300 dropped 0.8%, and South Korea’s KOSPI declined 0.9%. The move coincided with a 0.7% rise in the U.S. dollar index, which strengthened against the yen and yuan, pressuring export-dependent Asian economies. Treasury yields rose slightly, with the 10-year benchmark reaching 4.35%, reflecting concerns over longer-term inflation persistence. Investors are now recalibrating expectations for global monetary policy divergence, with Asia’s central banks, including the People’s Bank of China and Bank of Japan, closely monitoring U.S. developments. The Fed’s pause on balance sheet reduction may delay rate cuts in other regions, prolonging pressure on Asian currencies and bond markets.