ASX 200 rockets on latest US Fed interest rate call

The ASX 200 is soaring 1.3% as investors digest the latest news from the US Federal Reserve.

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The S&P/ASX 200 Index (ASX: XJO) is off to the races on Thursday on the heels of the US Federal Reserve's interest rate announcement yesterday.

Currently, the benchmark index is up 1.3%. Unless there's a dramatic turnaround in afternoon trade, this will mark the third consecutive day of gains.

The ASX 200 is following the lead of markets in the United States.

The S&P 500 Index (INDEXSP: .INX) closed up 1.1% overnight, and the tech-heavy Nasdaq Composite Index (INDEXNASDAQ: .IXIC) gained 1.6%.

The tech sector is also outperforming in Australia today. The S&P/ASX All Technology Index (ASX: XTX) – which also contains some smaller tech stocks outside of the ASX 200 – is up 2.6%.

Why is the ASX 200 rallying on the Fed's interest rate call?

Yesterday (overnight Aussie time) members of the Federal Open Market Committee (FOMC) unanimously voted to pause their rate hiking cycle. This is the second consecutive meeting rates have been left on hold.

That leaves the official US interest rate in the range of 5.25% to 5.50%, the highest level since 2001. Remarkably, it was only 20 months ago, in March 2022, that rates in the world's biggest economy stood at essentially 0%.

The FOMC noted (courtesy of Bloomberg) "tighter financial and credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation".

Higher long-term US Treasury yields got some of the credit for the central bank holding fire on another rate increase.

However, ASX 200 investors may want to hold off on popping their finest champagne just yet.

FOMC members also stressed that, "The extent of these effects remains uncertain." And the Fed "remains highly attentive to inflation risks".

Fed chair Jerome Powell also fuelled uncertainty about the need for future interest rate hikes to bring inflation back to the bank's 2% target.

"It's fair to say that's the question we're asking is 'Should we hike more?'" Powell said.

Powell added:

In light of the uncertainties and risks and how far we have come, the committee is proceeding carefully. We will continue to make our decisions meeting by meeting.

One key metric ASX 200 investors should keep an eye on to gauge the Fed's next likely move is US employment figures.

Powell indicated that should the US labour market's gradual pullback reverse, this could add to inflationary pressures and usher in another rate hike.

James Knightley, chief international economist for ING Financial Markets, however, sounded confident that we've seen the last interest rate boost from the Fed (courtesy of Bloomberg).

According to Knightley, "We don't expect any further hikes this cycle. Higher household and corporate borrowing costs are starting to bite."

ASX 200 investors might want to mark December 13 and January 31 on their calendars. That's when the FOMC will meet next to discuss any potential interest rate moves.

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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