When the ASX closed on Wednesday ahead of the market holiday to commemorate the death of Queen Elizabeth II, local eyes turned to the U.S. Federal Reserve’s impending interest rate announcement.
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The local Australian market has been weighed down by a jittery Wall Street over the last week, with U.S. traders remaining edgy ahead of the announcement.
The flow on effects saw local market volatility, with the ASX 200 ending at a two month low ahead of the market break, dropping 1.56%, to sit at to 6,700.20.
U.S. Fed hikes rates
After much speculation and asset positioning, U.S traders – and investors across the globe watching on – finally heard what they expected, but hoped wouldn’t actually happen. The Federal Reserve delivered a 75-basis-point federal funds rate increase.
The Fed increased interest rates by 0.75 percentage point for a third consecutive time, lowered its economic forecast for the U.S. and increased its expectations for higher inflation and unemployment.
There’s no sign the aggressive rate rises will ease in the future, based on reports that the Central Bank expects the federal funds rate to increase to 4.4% at the end of 2022, a faster rate-hike trajectory than the majority of prior Wall Street forecasts had indicated.
The announcement saw U.S. shares tumble, with the Dow Jones Industrial Average (DJIA), the S&P 500 (SPX), and the Nasdaq 100 (NDX) falling 1.7%, 1.71%, and 1.8%, respectively.
If the ASX continues following Wall Street’s movements, as it has over the last week, Australian shares are likely to head in the same direction when trading resumes on Friday.
Eyes will now turn to see how the Reserve Bank of Australia (RBA) reacts when it meets to hand down its next interest rate decision early next month.
How high could interest rates go in Australia?
Like the U.S. Fed, the RBA is expected to raise its interest rates again, as it works to wrestle down high inflation.
Earlier this month, the RBA raised the cash rate for a fifth consecutive month, to 2.35%.
The RBA governor, Philip Lowe, recently told a parliamentary committee, the board would consider either a 25-basis-point rise, or a successive 50-basis-point lift.
Banks, NAB and Westpac recently upgraded their forecast for next month’s cash rate increase to 50-basis-points, from 25-basis-points.
Final thought
With no strong sign aggressive rate rises, in either the U.S or Australia, are set to ease in the shorter term, investors will continue to watch central bank monetary policy decisions closely, to help inform trading decisions amid market volatility.
