What’s going on with the Federal Reserve and how might it impact ASX shares?

Federal Reserve ASX shares investor holding up a chart under the weight of interest rates.

ASX shares are poised to open higher this morning after the US Federal Reserve reassured markets about inflation and interest rates.

The futures market is pointing to a 0.5% rise in the S&P/ASX 200 Index (Index:^AXJO) this morning.

ASX shares are poised to rise with US shares, which recovered from early losses after the Fed released its policy decision.

How the Federal Reserve is stimulating ASX shares

The Fed said it will par stimulus but played down the prospects of an early rate hike to cool a spike in inflation.

The US central bank will reduce its bond purchase by US$15 billion to US$105 billion from this month. It said it is planning on completely stopping these purchases by 2022.

The Fed has been buying US government bonds and mortgage-backed securities to inject cash into the financial system. The Reserve Bank of Australia (RBA) have a similar but smaller scale program here.

It’s all about interest rates, stoopid

While such stimuli have been a big driver for the bull run in equities, the move has been well flagged. The market knew this was coming.

The wildcard was the Fed’s stance on interest rates. Credit markets pricing in rate hikes well ahead of what the Fed had telegraphed.

On that front, Fed chair Jerome Powell gave the bulls what they wanted – he stuck to the script. Powell said that rising cost pressures would prove to be “transitory”. This means a faster increase in interest rates won’t be required to control inflation.

ASX shares gets reassurance from the Fed

Markets have been obsessed by interest rates. This is true in Australia as well with ASX shares hanging on to the words of the RBA as credit markets here are also pricing in faster than forecast rate hikes.

Central banks use interest rates to control inflation, which have surged due to disruptions cased by the COVID-19 pandemic.

Higher commodity prices and the shortage of workers in multiple industries are also adding upward pressure on prices.

How big a deal is interest rates on shares?

But as international borders reopen and as some commodity prices, like iron ore, have pulled back from their peaks, the Fed is betting that inflation will ease.

The RBA is counting on the same thing. While everyone knows that interest rates can’t stay at record lows forever, ASX shares and international equities are not pricing one in for next year.

Share investors and credit traders are at loggerheads and one group will be paying a high price for getting the rate call wrong.

Not sure about you, but I know which team I am cheering for.

The post What’s going on with the Federal Reserve and how might it impact ASX shares? appeared first on The Motley Fool Australia.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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