Why the ASX 200 is rocketing on the latest US inflation and Fed interest rate news

ASX 200 investors are celebrating the latest inflation and interest rate news out of the US. But why?

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

In morning trade on Thursday, the benchmark Aussie index is up 0.7% at 7,772.1 points.

That sees the ASX 200 up 0.9% so far in June, despite the past two days of losses.

Australian shares are following in the footsteps of their US counterparts, with the S&P 500 Index (XSP: .INX) closing up 0.9% overnight at 5,421 points. That marked yet another new all-time for the S&P 500 as the US equity bull market entered its 20th month.

Investor exuberance is running high on the back of some promising US inflation data. This has traders forecasting that we'll see two interest rate cuts from the US Federal Reserve in 2024. That's despite the central bank's own forecast of just one rate cut this year. The Fed now expects more rate cuts for 2025.

Here's what's going on.

ASX 200 soars as US inflation slows

First, we turn to the US inflation print that sent the S&P 500 to a new closing high and is seeing the ASX 200 lift off today.

In a promising sign for investors, the US core consumer price index (CPI), which excludes volatile items like food and energy costs, increased by 0.2% in May. That puts US CPI up 3.4% year on year, the lowest inflationary print in three years.

"The most recent inflation readings have been more favourable than earlier in the year," Fed chair Jerome Powell said. Adding that "there has been modest further progress toward our inflation objective."

Though that wasn't enough to move the interest rate needle.

Federal Reserve holds interest rates steady

If the Fed had lowered interest rates, we'd likely be seeing an even bigger rally on the ASX 200 today.

But, in a widely anticipated move, Federal Open Market Committee (FOMC) members were unanimous in their decision to hold the official US interest rate in the 20-year high range of 5.25% to 5.50%.

"We'll need to see more good data to bolster our confidence that inflation is moving sustainably toward 2%," Powell said (quoted by Bloomberg).

According to the Fed, US and ASX 200 investors are now likely to see only one rate cut in 2024, while the central bank now expects to cut rates four times in 2025, up from prior forecasts of three cuts.

"Rate cuts that might have taken place this year take place next year. There are fewer rate cuts in the median this year, but there's one more next year," Powell said.

"The evidence is pretty clear that policy is restrictive and is having the effects that we would hope for," he added.

What are the experts saying?

Commenting on the latest US inflation data and interest rate outlook that's spurring the ASX 200 today, Bloomberg's Economics team said:

May's CPI report is encouraging — and the core PCE deflator will likely be even more so. We anticipate a string of similar reports this summer, setting the stage for the Fed to start cutting rates in September.

Jim Bullard, former president of the St Louis Fed, added:

I think this was good news for the committee. They've been looking for a softer report, they got it here.

We would need more news going in this direction in order to forge ahead with our easing policy. But it does keep hope alive for those that have been looking for an earlier rate cut.

And Scott Colyer, CEO at Advisors Asset Management, said:

The Fed adjusts their dot plots accordingly, so they change all the time and stock traders know that. It's clear the Fed really wants to cut rates at least one time this year. And those cuts, even if just once, will still be supportive for stock prices.

With US inflation slowing and significant Fed interest rate easing on the horizon, the ASX 200 could soon be resetting its own 28 March record closing high of 7,896.9 points.

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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