The US Federal Reserve reduced the interest rate by 25 basis points (0.25%) overnight. There may be more cuts within the next year, impacting S&P/ASX 200 Index (ASX: XJO) shares.
The US Fed has a similar role to the Reserve Bank of Australia (RBA) of blocking rampant inflation, but also assisting the economy staying out of recession. The direction of interest rates has been challenging to predict amid the significant tariff dynamic this year. But, the US Fed gave some indications about its intentions.
US Federal Reserve rate cut with more to come
The US central bank’s Federal Open Market Committee (FOMC) reduced the US interest rate by 25 basis points (0.25%) to leave the overnight funds rate at 4% to 4.25%.
This decision was a 11 to 1 vote, with the new member Stephen Miran being the only person that voted against the move, he wanted a 50 basis point (0.50%) reduction instead.
According to reporting by CNBC, the Fed acknowledged that job gains had slowed and that inflation has “has moved up and remains somewhat elevated”. It also said “Uncertainty about the economic outlook remains elevated. The Committee is attentive to the risks to both sides of its dual mandate and judges that downside risks to employment have risen.”
Fed Chair Jerome Powell noted that the tariffs have largely been covered by importing companies and the passthrough has been “pretty small” and slower than expected, but companies have said they eventually plan to pass on more of the cost increases onto consumers.
CNBC’s reporting also noted that a majority of decision makers at the US Federal Reserve are expecting two more cuts this year, though some are only expecting one cut. Another cut it also expected in 2026. However, the market (traders) had reportedly been expecting three cuts in 2026. Another cut is expected by the FOMC in 2027.
What does this mean for ASX 200 shares?
It will take some time for the potential interest rate cuts to occur and then longer than that for the full effect to be felt in the US and across the world.
The ASX share market is usually heavily influenced by the US share market in the short-term, so whatever happens, I think there will be a flow on effect to the ASX.
Lower interest rates should be a positive for share prices, but the market is seemingly already expecting these cuts.
I wouldn’t make any specific investment moves based on this news, but I’d keep it in mind (both the rate cuts and worsening job numbers) as I think about the next investments.
