It has been a great start to the day for the S&P/ASX 200 Index (ASX: XJO) on Thursday.
In morning trade, the benchmark index is up a massive 1.7% to 7,296.8 points.
Why is the ASX 200 charging higher?
The ASX 200 is charging higher today following an exceptionally strong night of trade on Wall Street.
In response to news that the US Federal Reserve has increased rates, the Dow Jones rose 1.55%, the S&P 500 climbed 2.2%, and the Nasdaq index stormed 3.8% higher.
The latter has put a rocket up Australian tech shares today, with the likes of Appen Ltd (ASX: APX) and Zip Co Ltd (ASX: Z1P) up more than 6% in early trade. This has helped drive the S&P ASX All Technology index up 4.2%.
Elsewhere, Commonwealth Bank of Australia (ASX: CBA) and the rest of the big four banks are all up at least 1% currently.
US Federal Reserve raises rates
Overnight the US Federal Reserve elected to increase rates by 0.25%, bringing the Fed funds rate to the range of 0.25% to 0.5%.
The central bank explained that it made the move in response to strong economic data and to combat inflationary pressures.
“Indicators of economic activity and employment have continued to strengthen. Job gains have been strong in recent months, and the unemployment rate has declined substantially. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures.
The invasion of Ukraine by Russia is causing tremendous human and economic hardship. The implications for the U.S. economy are highly uncertain, but in the near term the invasion and related events are likely to create additional upward pressure on inflation and weigh on economic activity.
The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With appropriate firming in the stance of monetary policy, the Committee expects inflation to return to its 2 percent objective and the labor market to remain strong. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 1/4 to 1/2 percent and anticipates that ongoing increases in the target range will be appropriate.”
The final sentence is being interpreted as six more rate increases in 2022, one at each of the US Fed’s remaining meetings.
So why are ASX 200 shares rising?
Given how panicked investors have been about rising rates, it may seem peculiar that US and ASX 200 shares are rallying on the news.
Interestingly, the initial reaction was not positive, with US shares falling shortly after the announcement before staging an almighty recovery in the final hour of trade.
E-Trade’s Managing Director of Investment Strategy, Mike Loewengart, believes the market is interpreting the news positively due to it signalling confidence in the US economy.
He told CNBC: “The market seems to be taking today’s news in stride, which means it likely priced in today’s announcement accordingly. And let’s not forget that monetary tightening means the Fed believes the economy is on solid footing, which is a good thing at the end of the day.”
The post ASX 200 shares open with a bang following US interest rate rise appeared first on The Motley Fool Australia.
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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns and has recommended Appen Ltd and ZIPCOLTD FPO. The Motley Fool Australia owns and has recommended Appen Ltd. 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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