Why is the ASX 200 having such a cracking day on Wednesday?

The ASX 200 is flying higher today.

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The S&P/ASX 200 Index (ASX: XJO) is off to the races today.

In morning trade, the benchmark index is up a stellar 1.4%, at 7,104 points, having earlier posted gains of more than 1.6%.

And ASX tech shares are leading the charge. The S&P/ASX All Technology Index (ASX: XTX) – which also contains smaller companies outside of the ASX 200 – is up a whopping 1.8% at the time of writing.

So, what's going on?

ASX 200 rallies on slowing US inflation

It looks like Aussie investors have slowing inflation in the world's largest economy to thank for today's big ASX 200 rally.

As in Australia with the RBA's hawkish tightening cycles, soaring inflation in the United States has seen the Federal Reserve aggressively boosting interest rates, commencing in early 2022. And higher interest rates tend to throw up headwinds for many stocks.

In the latest report, released overnight, headline US inflation declined to 3.2% for the full year through October, dropping from a 3.7% annual reading over the past two months. And the 4% core inflation reading, which excludes volatile items like energy and food, came in at the slowest pace in two years.

With many analysts now believing we've seen the last rate hike from the US Fed, investors reacted by sending the S&P 500 Index (INDEXSP: .INX) up 1.9%. Like with the ASX 200 today, that's right near a two-month high.

And as with ASX tech shares, US tech stocks were some of the biggest gainers, with the Nasdaq Composite Index (INDEXNASDAQ: .IXIC) closing up 2.4%.

Beyond an end to rate hikes, a number of prominent market experts are upping their bets on pending rate cuts from the Fed.

Among them, Cathie Wood, CEO of ARK Investment Management, says that deflation pressures are already beginning to emerge in the US.

According to Wood (courtesy of Bloomberg):

The Federal Reserve has overdone it, we're going to see a lot more deflation going forward. If we're right, and they've gone way too far, they'll have to cut fairly significantly.

If Wood does have this one right and the Federal Reserve begins to reduce interest rates "fairly significantly", that would prove good news for ASX 200 investors as well.

If history tells us anything it's that where the Fed goes the RBA tends to follow.

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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