The US Federal Reserve has indicated that interest rate rises are likely to come earlier than expected. What does this mean for ASX shares?
US Federal Reserve indications
The members of the US Federal Reserve have just held their meeting. Inflation and economic growth is stronger than original expectations.
According to reporting by the Australian Financial Review, officials expect to start raising interest rates next year with two hikes by 2023.
Overall inflation is expected to be 3.4% this year, up from previous expectations of 2.4% three months ago. Economic growth is expected to be up to 7% for the year, stronger than previous expectations of 6.5%.
Fed commentary
Federal Reserve Chairman Jerome Powell had some comments, as reported by the AFR:
“Inflation has come in ahead of expectations in the last few months. Is there a risk that inflation could be higher than we think? Yes.
“There is a lot of uncertainty. We need to see how things evolve in coming months. This is an extraordinarily unusual time. The economy is growing at a very healthy rate. Since March, people have grown more confident that these strong outcomes will be achieved.”
He also said that it would be appropriate to consider announcing a plan for reducing asset purchases at a future meeting, though the Fed will give advance notice before announcing any decision. The timing of reducing quantitative easing will be based on the progress of employment and inflation goals, rather than based on a date.
Mr Powell said: “We will taper when we feel the economy has achieved substantial process. We will do what we can to avoid a market reaction
.”
What does this mean for ASX shares?
Interest rates are meant to play a very important part in the valuation of businesses. Rising interest rates can be a good thing for businesses that make money from interest such as Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group Ltd (ASX: ANZ), Computershare Ltd (ASX: CPU) and Netwealth Ltd (ASX: NWL).
However, business that have debt, or are asset plays, may see some volatility. I’m thinking of names like Goodman Group (ASX: GMG), Afterpay Ltd (ASX: APT) and Sydney Airport Holdings Pty Ltd (ASX: SYD).
Rising US interest rates could also have an impact on exchange rates. A higher US interest rate might make the US dollar seem more attractive and the Australian dollar less attractive. This would impact businesses like CSL Limited (ASX: CSL), BHP Group Ltd (ASX: BHP) and Rio Tinto Limited (ASX: RIO).
It’ll be interesting to see what happens today and the next few years with interest rates and asset prices.
