The ASX share market is under the spotlight today after the US Federal Reserve decided to hike the interest rate.
US interest rates are incredibly important for the global economy because of how many assets are priced against US government bonds. When the US interest rate rises, that can be a headwind for assets like shares and property. Investors can now get a better return from ‘safe’ bonds, so that has a flow-on effect to other risk assets.
US Federal Reserve raises rates
It was a unanimous decision by the Federal Reserve governors to hike the interest rate by 0.25% to a target range of between 3.75% to 4%.
The unanimous vote may be surprising considering the talk from certain individuals. Trump’s pick for Chair, Kevin Warsh, was also one that voted to raise rates.
Fed Chair Kevin Warsh said at the press conference, according to reporting by CNBC:
Our predominant focus is on the price stability side of our mandate. The plain fact is that inflation is too high and has been for too long.
Price stability is foundational to economic growth, and I think we took an important step today to deliver it. We did it in part by removing the dose of accommodation that I mentioned before.
We cannot affect any individual price. But what we can do and will do is ensure that any change in relative prices don’t broaden out, don’t have second and third order effects on the economy. That’s what we’re tasked to do, and that’s what we do.
We made this decision today based on our assessment of the situation, based on our assessment of the trajectory for employment, based on our judgment on the strength of the economy, sometimes the market tries to prejudge our outcomes. I’ll observe market prices and see what they have to say. But today was our decision.
Is it one and done?
The Federal Reserve now expects inflation to rise to the end of the year. The median projection now suggests the core personal consumption inflation could reach 3.4%, up from the 3.3% projected at the June meeting.
According to CNBC, the US Federal Reserve members now expect one more rate hike this year – 12 members indicated another increase and four expect two more rate hikes this year, while two suggested that rates should stay at the current level.
What does this mean for the ASX share market?
On a day to day basis, the ASX share market does tend to follow the movements on the US stock market.
Overnight, the Dow Jones declined 1.2% and the S&P 500 dropped 0.45%, showing that the global investors didn’t like what they saw with the inflation commentary and the potential for at least one more rate hike.
ASX futures currently suggest that the ASX share market could fall by 0.8% at the open, which is not ideal.
In my eyes, lower share prices is a buying opportunity, so I’ll be happy to make some investments if share prices go lower.
