S&P/ASX 200 Index (ASX: XJO) shares offered a timely reminder last year on the impact of rising interest rates.
After more than a decade of easy money policies, 2022 saw global central banks – led by the United States Federal Reserve – begin to ratchet up record low rates to tame fast rising inflation.
In US markets, the hawkish pivot saw the S&P 500 Index end the year down 19.4%.
In Australia, impacted by both the Fed and the RBA hikes, the ASX 200 managed to fare better. Though the benchmark index still closed the year down 5.5%.
With that in mind, investors in ASX 200 shares would do well to keep an eye on the likely upcoming policy moves from the Fed.
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What can ASX 200 investors expect from the Fed in 2023?
The Fed's target rate kicked off 2022 in the range of 0.00% to 0.25%. It ended the year in the current range of 4.25% to 4.50%.
ASX 200 investors hoping that the world's top central bank may hold off on further rate hikes at this level are likely to be disappointed.
According to the minutes from the Fed's last policy meeting, released overnight Aussie time, Fed officials doubled down on their determination to bring inflation back down to their 2% target range. And the officials warned investors that rates are likely to stay high for some time yet.
The officials said (courtesy of Bloomberg) that "an unwarranted easing in financial conditions, especially if driven by a misperception by the public of the committee's reaction function, would complicate the committee's effort to restore price stability".
"A big concern of their messaging here is that the market is pricing in cuts by the second half of this year," Michael Feroli, chief US economist at JPMorgan Chase & Co said.
Indeed, ASX 200 investors should understand that any rate cuts from the Fed appear unlikely to eventuate in 2023.
Derek Tang, an economist at LH Meyer, said investors should prepare for another 0.50% rate hike from the Fed next month:
They don't see light at the end of the tunnel yet with inflation. They're so alert of financial easing that's 'unwarranted' that the scale should tilt to staying with 50 basis points in February. That'll drive the message home.
According to Bloomberg, 17 of 19 Fed officials forecast that the benchmark interest rate in the US will hit at least 5.1% in 2023. That's a hawkish shift from September when the officials unanimously believed rates would not exceed 5% this year.
