Why ASX 200 shares are charging higher following super-sized US Fed rate hike

Fed chair Jerome Powell waved off fears of a US recession, indicating the economy is well positioned to handle the interest rate hikes.

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Key points

  • ASX 200 shares up 1% in early trade
  • The US Fed has upped the official interest rate by 0.75%, the biggest hike in 28 years
  • Fed chair Jerome Powell indicates further outsized rate hikes will be uncommon

S&P/ASX 200 Index (ASX: XJO) shares are charging higher in early trade today, up 1.0%

Investors will welcome the change in momentum after ASX 200 shares dropped 1.3% yesterday, bringing the benchmark’s year-to-date losses to 13.0% at Wednesday’s close.

Today’s gains come in the wake of the biggest interest rate hike delivered by the US Federal Reserve in 28 years.

Overnight the Fed announced a 0.75% rate increase, lifting the target range for the federal funds rate to 1.5% to 1.75%.

And almost every sector is joining in the rally.

ASX 200 shares by sector

Here’s how ASX 200 shares are performing this morning by sector:

  • S&P/ASX 200 Energy Index (ASX: XEJ) down 0.6%
  • S&P/ASX 200 Resource Index (ASX: XJR) up 1.0%
  • S&P/ASX 200 Financials Index (ASX: XFJ) up 1.2%
  • S&P/ASX All Technology Index (ASX: XTX)* up 1.3%  (*This index contains some stocks outside of ASX 200 shares)

So, why are markets rallying after the world’s most influential central bank upped rates by the most since 1994?

‘Flexibly hawkish’ Fed chair

ASX 200 shares are following US stocks higher, with the S&P 500 Index (SP: .INX) closing up 1.5% yesterday (overnight Aussie time) and the tech-heavy Nasdaq Composite (NASDAQ: .IXIC) finishing up 2.5%.

The Fed’s 0.75% rate hike was higher than the 0.50% most analysts had predicted last week. But by Monday, many analysts were predicting the larger increase. This saw markets selling off earlier in the week, pricing in the outsized rate hike.

Fed chair Jerome Powell also placated markets by indicating further rate hikes of this size would be uncommon.

“Clearly, today’s 75 basis-point increase is an unusually large one and I do not expect moves of this size to be common,” he said.

Commenting on Powell’s remarks, Evercore ISI’s Krishna Guha and Peter Williams said (quoted by Bloomberg): “Powell’s press conference came across much less hawkish than the initial message. Flexibly hawkish came across as a risk-friendly combination in asset markets.”

The Fed now forecasts that the official rate will hit 3.4% in December and lift to 3.8% in 2023, significantly higher than what the central bank had forecast as recently as March.

That, as you’re likely aware, is due to hot-running inflation in the world’s top economy.

“One of the factors in our deciding to move ahead with 75 basis points today was what we saw in inflation expectations,” Powell said.

Separately, the Fed stated:

The invasion of Ukraine by Russia is causing tremendous human and economic hardship … In addition, Covid-related lockdowns in China are likely to exacerbate supply chain disruptions. The Committee is highly attentive to inflation risks.

US inflation is climbing at its fastest pace in 40 years. After slipping in April to 8.3%, from 8.5% in March, inflation surprised to the upside last Friday, with May’s figures coming in at 8.6%.

Despite the big rate increases and large monthly reductions in the Fed’s massive balance sheet, Powell indicated that the US isn’t likely to nosedive into a recession.

“It does appear that the US economy is in a strong position, and well positioned to deal with higher interest rates,” he said.

That strength should help support both US stocks and ASX 200 shares in the year ahead.

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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