The S&P/ASX 200 Index (ASX: XJO) is taking a tumble today, down 1.81% at the time of writing.
Aussie markets were closed yesterday as part of the national holiday in honour of the Queen's passing.
That means ASX 200 shares are playing some catchup with their global peers following Wednesday night's 0.75% interest rate hike by the US Federal Reserve.
While that move was widely expected, Fed chair Jerome Powell's decidedly hawkish words sent US markets sharply lower over the past two trading days.
How did the Fed spook ASX 200 investors?
Stock markets had widely priced in the US Fed's 0.75% rate rise. This brings the benchmark rate in the world's largest economy to a range of 3.00% to 3.25%.
In fact, you may have even expected somewhat of a relief rally, as an increasing number of economists had forecast the Fed might raise by a full 1.00%.
But then markets tend to be forward-looking. And US stocks, and the ASX 200 today, appear to be selling off on what Powell indicated may lie ahead.
Here's what Powell told journalists after the announcement (courtesy of Bloomberg):
We have got to get inflation behind us. I wish there were a painless way to do that. There isn't. Higher interest rates, slower growth and a softening labour market are all painful for the public that we serve. But they're not as painful as failing to restore price stability and having to come back and do it down the road again.
Also roiling global markets and the ASX 200 is the higher rate expectations expressed by members of the Federal Open Market Committee. The majority of FOMC have upped their forecasts and believe rates in the US will top out above the 4.5% that markets have priced in.
Bloomberg Economics reported its team expects the terminal rate will ultimately be 5%.
Is the Fed targeting stock markets?
After a strong run in 2021, the ASX 200 is now down 13.2% in 2022 amid the new dawn of rate rises from the US Fed, the RBA, and a host of central banks the world over.
In the US, the S&P 500 Index (SP: .INX) is doing it even tougher, down 21.7% year-to-date, officially in bear market territory.
As for tech shares, the NASDAQ is down a painful 30.1%, while here in Australia the S&P/ASX All Technology Index (ASX: XTX) has crashed 34.5%.
And with the Fed boosting aggressively, the RBA and other leading central banks may be more inclined to do the same to get their own nations' rocketing inflation under control, which could continue to throw up some tailwinds for ASX 200 shares in the months ahead.
Speaking to CNBC, Oanda senior market analyst Ed Moya said, "The Fed's paved the way for much of the world to continue with aggressive rate hikes, and that's going to lead to a global recession. And how severe it is will be determined on how long it takes inflation to come down."
Art Hogan, chief market strategist at B. Riley, said equity markets, which would include the ASX 200, are in for some disinflation as higher rates stem demand.
According to Hogan (quoted by Bloomberg):
If there are more aggressive sellers and less aggressive buyers, that supply-demand imbalance is going to cause some disinflation in equity prices for sure. And to the extent that that's what we're going through now, it's similar to demand being diminished for other things.
Bespoke Investment Group global macro strategist George Pearkes says investors are having a difficult time gauging the market bottom following the Fed's latest message.
"The message from the Fed is that 'We're going to keep hiking until something goes wrong,'" he said. "The fact that nothing's broken yet tells us we're not done. If the Fed is in that mood, how are markets supposed to bottom?"
Kim Forrest, chief investment officer at Bokeh Capital Partners is still looking to buy shares. But she echoed Pearkes' uncertainty, shared by many ASX 200 investors today, about where the market may turn around:
The Fed has laid out this strategy for killing inflation and it looks like it's going to kill the economy too. And that is why we have a buyer's strike. The whole thing is I sat there this morning looking over things I want to buy and my big question is this: are they going to be cheaper next month? And the answer is maybe. Maybe.
By 2052, ASX 200 shares today may look like an unbelievable bargain
We'll leave off with a word from The Motley Fool's own chief investment officer, Scott Phillips.
When it comes to buying ASX 200 shares, Phillips isn't trying to time the market. With a long-term investment horizon, he points to the historic 9% annual compound gains as the norm.
As for the current retrace, he said, "I expect that in 2052, we'll look back at 2022 and wish we'd all invested more money today."
