S&P/ASX 200 Index (ASX: XJO) investors will wake up tomorrow to the latest interest rate decision from the United States Federal Reserve.
It was just over a month ago, on 4 May, that the Fed unexpectedly increased interest rates in the world's top economy by another 0.25%. This puts the official US interest in the range of 5.00% to 5.25%. That's the highest cash rate in the US since 2007, by the way.
If you were watching your screens on the day, you'll have seen the ASX 200 slide almost 1% in morning trade as investors digested the likely impact.
Of course, that's all monetary policy water under the bridge.
The question now is what can ASX 200 investors expect from the Fed's upcoming decision today (overnight Aussie time)?
Should ASX 200 investors expect a Fed pause?
The latest inflation data out of the US lends some credence to the growing likelihood that the ASX 200 won't have to deal with another Fed rate hike tomorrow.
The Consumer Price Index (CPI) increased by a less-than-expected 0.1% in May amid lower petrol and electricity costs. That brings annual headline inflation in the US down to approximately 4% for the 12 months through to 31 May.
While inflation is still double the Fed's target range, the slowdown has the majority of analysts predicting the Fed won't lift rates tonight. Though that doesn't mean another hike might not be on the cards later in the year.
Commenting on whether ASX 200 investors will awake to a fresh rate hike from the Fed, market analyst at eToro Josh Gilbert said:
The report showed no upward surprises to inflation, which will likely see the Fed skip a hike this week but leave the door open for more rate increases if required. So that means a pause isn't the end. The risk here is more hikes than markets are pricing or higher rates for a longer period of time.
Head of investment strategy at SoFi Liz Young is also in the pause camp.
"If the Fed was looking for data to point to say, 'We're going to pause in June,' I think they got it today," Young said (quoted by Reuters).
She added:
But it's another one of those that you can cut whichever way you want to make your case. If you want to be bullish, you say inflation is down more than 50% since its peak. If you want to be bearish, you can say inflation is still more than twice the Fed's target.
Rounding off with another expert who believes the ASX 200 will be spared another rate increase from the world's most influential central bank is senior US strategist at Rabobank Philip Marey.
"Powell expressed his bias in favour of remaining on hold in June … he's going to stick with that as it gives them an additional month of data to look at," Marey said, referencing Fed chair Jerome Powell.
Or will the Fed opt to hike rates again?
Not everyone is convinced that the Fed will pause this month.
Citi, for one, believes ASX 200 investors should expect a June rate hike (courtesy of The Australian Financial Review).
Citi economists Veronica Clark and Andrew Hollenhorst believe we'll see another 0.25% increase tonight. They point out that Powell has stressed the Fed's decisions are based on hard data. And with inflation figures still well above its target range, the central bank will likely tighten.
"Despite markets pricing very little chance of a rate hike by the Fed tomorrow, we maintain our base case for a 25-basis-point hike," they said.
Citi's economists added:
While lack of market pricing for a rate hike admittedly makes tomorrow's outcome a very close call, we see market pricing as misled… We would expect some hawkish surprise at some point as underlying inflation remains stably too strong.
With the market largely having priced in a Fed pause, if Citi has this one right, the ASX 200 – up 0.29% so far today – could struggle tomorrow.
