The Federal Reserve just kept interest rates on hold. So why is the ASX 200 slumping?

Despite the Fed holding interest rates steady, US and Aussie investors are feeling jittery.

| More on:
A man looking at his laptop and thinking.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

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.

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.

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.

More on Share Market News

Happy young couple saving money in piggy bank.
Opinions

Want to start investing in ASX shares? Here's what I'd buy

This is where I’d begin to put my money in the stock market.

Read more »

A female ASX investor looks through a magnifying glass that enlarges her eye and holds her hand to her face with her mouth open as if looking at something of great interest or surprise.
Broker Notes

3 of the best ASX 200 shares to buy in 2025

Let's see why analysts at Bell Potter are bullish on these shares next year.

Read more »

People of different ethnicities in a room taking a big selfie, symbolising diversification.
Opinions

Want diversification? Get it instantly with these ASX 200 shares

Some businesses offer a lot more diversification than others.

Read more »

A happy man and woman on a computer at Christmas, indicating a positive trend for retail shares.
Opinions

2 ASX 200 shares I'd want to receive as a present today

Merry Christmas! Are there any stocks under your tree?

Read more »

a young woman raises her hands in joyful celebration as she sits at her computer in a home environment.
Share Gainers

Why Avita Medical, GenusPlus, Mesoblast, and Polynovo shares are storming higher

These shares are having a better day than most today. But why?

Read more »

Three guys in shirts and ties give the thumbs down.
Share Fallers

Why Charter Hall Retail, DroneShield, FBR, and St Barbara shares are tumbling today

These shares are having a tough time on Tuesday. But why?

Read more »

Contented looking man leans back in his chair at his desk and smiles.
Broker Notes

Leading brokers name 3 ASX shares to buy today

Here's why brokers believe that now could be the time to snap up these stocks.

Read more »

A female broker in a red jacket whispers in the ear of a man who has a surprised look on his face as she explains which two ASX 200 shares should do well in today's volatile climate
Broker Notes

2 of the best ASX shares to buy in 2025

Bell Potter is feeling bullish on these shares as the new year approaches.

Read more »