ASX 200 tumbles on US Fed interest rate hike. Now what?

The S&P/ASX 200 Index (ASX: XJO) is down 0.88% in morning trade on Thursday.

This comes on the heels of the latest interest rate increase by the United States Federal Reserve, announced overnight Aussie time.

ASX 200 slides on US rate hike

Having gained 0.9% yesterday, the ASX 200 is following US markets lower today after the Fed boosted rates in the world’s top economy by another 0.25%.

The Federal Open Market Committee (FOMC) members were unanimous in their decision.

The latest lift makes it nine meetings in a row that the FOMC has boosted rates. The official US interest rate now stands at 5%. That’s the highest borrowing costs since September 2007, shortly before the onset of the GFC.

The move was widely expected, with some 80% of polled economists predicting a quarter-percentage increase.

Some ASX 200 investors will still be disappointed, having hoped for a pause in the wake of the banking crisis unleashed by the collapse of Silicon Valley Bank.

However, Fed chair Jerome Powell indicated his confidence that the US banking sector is sound and can withstand additional rate hikes if needed to tame still-hot inflation.

“We are committed to restoring price stability, and all of the evidence says that the public has confidence that we will do so,” Powell said. “It is important that we sustain that confidence with our actions as well as our words.”

According to Bloomberg economists Anna Wong, Stuart Paul, and Eliza Winger:

A 25-basis-point hike at the March meeting shows the FOMC is resolved to prioritize use of monetary-policy tools to fight too-high inflation. It also signalled their confidence in the US banking system.

What can ASX 200 investors expect next?

Powell remained committed to bringing inflation back within the Fed’s target range, but his language took a decidedly dovish turn.

“We no longer state that we anticipate ongoing rate increases will be appropriate to quell inflation. Instead, we now anticipate that some additional policy firming may be appropriate,” he said.

However, ASX 200 investors shouldn’t expect any rate cuts from the world’s most influential central bank this year, with Powell saying the FOMC members “just don’t” see that happening in 2023.

Rather than refer to additional rate hikes on the horizon, the Fed stated it “anticipates that some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time”.

Officials expect the US benchmark rate will stand at 5.1% at the end of the year and average 4.3% in 2024.

What the experts are saying

Many analysts are concerned that the Fed may be too optimistic in its assessment of the health of the US and international banking sectors.

That could lead to the Fed easing sooner than expected, which would likely see US stocks and the ASX 200 rally.

According to ING chief international economist James Knightley (quoted by Bloomberg):

The Fed appears quietly confident the economy won’t be heavily disrupted by recent banking sector woes. We are a more pessimistic. Our concern was that this has been the most aggressive monetary policy tightening cycle for 40 years and by going harder and faster into restrictive territory you naturally have less control over the outcome.

Portfolio manager at Integrity Asset Management Joe Gilbert added:

Powell is trying to have it both ways. He is trying to appease both the hawks and the doves. This ultimately may be the last rate hike this year, but Powell has to make the market believe that it isn’t because that would loosen financial conditions too much.

The softening to come in the economy from the banking collapses has yet to be felt and the Fed knows this but they cannot be alarmists.

The post ASX 200 tumbles on US Fed interest rate hike. Now what? appeared first on The Motley Fool Australia.

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Motley Fool contributor Bernd Struben 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 Scott Phillips.

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