What can ASX 200 investors expect from the US Fed in 2023?

The S&P/ASX 200 Index (ASX: XJO) is up 0.23% in early afternoon trade on Monday.

Australia’s benchmark index is bucking the selling trend that took hold in the United States on Friday, which saw all the major US indices close in the red.

The reason?

Despite the ongoing banking turmoil impacting regional US banks, investors are upping their bets on another rate hike from the Fed in May.

And ASX 200 shares have been pressured this past year not just from increasing rates by the Reserve Bank of Australia, but also from past tightening by the Fed.

With that in mind, here’s what some industry experts are expecting from the world’s most influential central bank (that’s the Fed not the RBA, sorry Philip Lowe!) over the rest of 2023.

First up, we turn to Morgan Stanley’s chief US economist Ellen Zentner.

If Zentner is correct, ASX 200 investors should expect another 0.25% rate increase from the Fed in May before the central bank potentially enters into a holding pattern in June.

According to Zentner (quoted by The Australian Financial Review):

Leading up to the June meeting, we think further slowing in employment and core inflation, alongside the judgment that cumulative effects of past policy actions and tighter credit means policy is sufficiently in restrictive territory, and will keep the Fed comfortable with holding rates steady.

Our preliminary forecast for May job gains at 136,000 and core CPI at 0.25 month, we think extends the evidence of slowing momentum, and policymakers will be able to extrapolate from recent trends.

But if US jobs numbers come in stronger than expected, labour costs would continue to fuel inflation in the world’s biggest economy.

“More resilience in the labour market could put another hike in June on the table,” Zentner said.

Oxford Economics US chief economist Bob Schwartz said that with “an economy that is rapidly losing steam amid growing signs of slowing inflation”, ASX 200 investors can likely expect the last rate hike of 2023 from the Fed next month.

“The odds that the next increase will be the last of the rate-hiking cycle are also increasing,” he said.

According to Schwartz (quoted by the AFR):

Understandably, the Fed is frustrated that inflation has not retreated as quickly as it hoped, given the aggressive policy tightening over the past year. But the disinflationary trend is well underway and questions about whether more rate hikes are needed to nudge it along are bound to gain traction after the May 3 meeting.

But Schwartz admitted that taking the US inflation rate from the current 5% down to the Fed’s 2% target range could be more difficult than the success the central bank has had to date in bringing inflation down from the earlier sky-high level of 9%.

“The question is, how much pain is the Fed willing to inflict on the economy to reach that target?” he said.

And, speaking to Bloomberg TV, Frances Stacy, director of strategy at Optimal Capital Advisors, also expects ASX 200 investors will see at least one more rate hike from the Fed next month.

“I don’t think all of the rate hikes have worked their way through the system and it looks as though the Fed is going to continue to tighten,” Stacy said.

Though, judging by today’s solid performance, the ASX 200 may prove resilient to the next Federal Reserve rate increase.

The post What can ASX 200 investors expect from the US Fed in 2023? 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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