The US Federal Reserve has reduced the interest rate by 25 basis points (0.25%), sparking a rally of the S&P/ASX 200 (ASX: XJO) and the US share market.
In the USA, the Federal Reserve is a similar entity to the Reserve Bank of Australia (RBA). A key job is to move the interest rate up and down to try to control inflation or support the economy (and employment levels).
US Federal Reserve reduces the interest rate
For the third time this year, the Federal Reserve decided to reduce the interest rate with a 25 basis point (0.25%) cut. That has taken the interest rate to a range of between 3.5% to 3.75%.
CNBC reported that this was not a unanimous decision – there were two votes for no cut at all and one vote for a 50 basis point (0.50%) cut.
Interest rate changes are key for the share market because a lower interest rate can boost asset prices, such as ASX 200 shares. A lower interest rate makes safe returns from bonds and bank savings look less appealing, boosting demand for other assets like shares and property.
In terms of the outlook for further cuts, CNBC reported the Federal Reserve Chair Jerome Powell said:
We are well positioned to wait and see how the economy evolves. We’re in the high end of the range of neutral. It’s so happened that we’ve cut three times. We haven’t made any decision about January, but as I said, we think we’re well positioned to wait and see how the economy performs.
The discussions we have are as good as any we’ve had in my 14 years at the Fed, very thoughtful, respectful, and you just have people who have strong views, and we come together and we reach a place where we can make a decision.
US Federal Reserve officials also show how many interest rate cuts they’re expecting in the medium-term. CNBC reported that based on the individual expectations of officials, one rate cut is expected in 2026 and other is expected in 2027.
The Fed also announced that it will start buying Treasury securities again. It will buy $40 billion and then “remain elevated for a few months”, but after that it will be “significantly reduced”.
What to make of this for ASX 200 shares
Clearly, it’s good news in the short-term for ASX shares.
The Australian share market is often influenced on a day to day basis by what’s happening in the US share market. The S&P 500 rose by 0.7% overnight in response to this development and the ASX 200 is up by a similar amount.
Will this rate cut spur inflation in the US and be problematic in 2026? Time will tell.
I wouldn’t necessarily buy or sell any particular investment based on this news, but I think it could bring inflation further into the picture in 2026 for the economy and investors.
I’ll continue to look out for investments that look like appealing buys, regardless of what’s happening.
