The US Federal Reserve opted to keep interest rates on hold yesterday (overnight Aussie time).
With the Fed taking a pass on an interest rate hike following the latest Federal Open Market Committee (FOMC) meeting, the official funds rate in the United States remains in the 5.25% to 5.50% range.
So, why is the S&P/ASX 200 Index (ASX: XJO) down 0.5% in morning trade?
Well, part of that answer lies with how US markets responded.
In the wake of the Fed interest rate announcement, the S&P 500 Index (SP: .INX) closed down 0.9%. And US tech stocks fell harder, with the Nasdaq Composite Index (NASDAQ: .IXIC) finishing the day down 1.5%.
Here's why markets in the US as well as the ASX 200 have come under selling pressure.
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Why is the ASX 200 down if the Fed held interest rates steady?
While it may seem ages ago, it was only back in March 2022 that interest rates in the world's top economy were just about zero.
That means the Fed's interest rate increases to the current 5.25% to 5.50% range is having a truly massive impact on borrowing costs.
The ASX 200 is getting headwinds today, not from a pause in hikes, but rather from some decidedly hawkish signals from the world's most influential central bank. The Fed left the door wide open for one more interest rate hike in 2023. And officials indicated rates would stay elevated for longer than previously forecast to get inflation back to its 2% target range.
As Bloomberg reports, 12 of 19 officials said they were in favour of another rate increase in 2023.
Fed Chair Jerome Powell said the central bank was "prepared to raise rates further if appropriate".
He added, "We intend to hold policy at a restrictive level until we're confident that inflation is moving down sustainably toward our objective."
And ASX 200 investors don't appear overly enthused today by Powell's assertion that the Fed is unlikely to lift interest rates much higher than current levels.
"We're fairly close, we think, to where we need to get," Powell noted.
It's the higher rates for longer mantra that appears to have ASX investors jittery.
In June, Fed officials forecast they'd likely be cutting interest rates to 4.6% by the end of 2024. That median estimate has now been increased to 5.1%.
What are the experts saying?
Commenting on the latest Fed interest pause and hawkish guidance, Quincy Krosby, chief global strategist at LPL Financial said (courtesy of Bloomberg):
Powell to markets: This is a 'skip,' not at a pause. He underscored numerous times that while the Fed remains data dependent and can proceed carefully, another rate hike remains on the table.
Will Compernolle, macro strategist at FHN Financial, said, "Overall, this was the 'hawkish skip' we were expecting."
And Compernolle cautioned that investors, including those here on the ASX 200, shouldn't rule out the potential of more than one additional interest rate hike from the Fed.
"Just because the 2023 median dot shows one more hike, that doesn't necessarily represent the terminal rate. There could be more increases early next year," he said.
John Lynch, chief investment officer at Comerica Wealth Management added (quoted by Bloomberg):
This is consistent with our 'higher for longer' expectation. To the degree the Fed holds rates steady, any improvement in core inflation measures leads to higher real rates, which serve to further constrain credit while eliminating the need for the Fed to raise rates during an election year.
Foolish takeaway
While the ASX 200 is following US markets lower today, that doesn't mean there aren't some great investment opportunities out there. Particularly those stocks that can outperform in a higher interest rate environment.
Remember, any pullback in the markets can often throw up some great long-term bargains.
