- The US Federal Reserve springs a bearish surprise on investors with potential plans to begin lifting interest rates a year earlier than widely predicted
- Analysts have been largely predicting rates to go untouched until 2024, but the Fed now says the US could see two rate hikes before the end of 2023
- At the same time, the US central bank is considering scaling back its bond-buying program — sending Wall Street lower and the US dollar higher
- In Australia, the RBA says Australia is still in “recovery mode” and, as such, there are no significant changes in monetary policy sentiment at this stage
- Still, the ASX is following Wall Street’s footsteps and trading red this afternoon, though the ASX 200 index is down just 0.7 per cent at 1:26 pm AEST
The US Federal Reserve sprung a bearish surprise on investors overnight as it flagged plans to begin lifting interest rates a year earlier than widely predicted.
Analysts have been expecting the federal funds rate to stay at its near-historic low of 0.25 per cent through to 2024, but the Fed said in a Wednesday meeting it expects two rate hikes before the end of 2023.
At the same time, Fed Chair Jerome Powell told reporters that the central bank has also kicked off discussions about scaling back its bond buying program.
According to the Federal Reserve, vaccination rates and a stronger-than-expected economic recovery are affecting its outlook for monetary policy, hence the surprise shift in sentiment after the June meeting.
The result was a sudden plunge on US markets, with the Dow Jones down 373 points, or 1.09 per cent, at one stage to 33,395 points. While the index recouped some of the lost ground and closed 0.77 per cent lower at just above 34,000, the impact of the Fed’s monetary policy outlook was still evident.
The US dollar rose alongside yields on 10-year treasuries on the back on the Fed’s update.
The Federal Reserve’s comments seemed to surprise analysts, with Janus Henderson Multi-Asset fund manager Oliver Blackbourn flagging the “instant” effect the Fed update had in markets.
“This time there was no denying it: the Federal Reserve took its first tentative steps on a more hawkish path,” Mr Blackbourn said.
“While there was no immediate change in policy, the median projections for interest rates saw two hikes leap into the forecast for the end of 2023. Additionally, the talking about tapering finally began.”
He added that the Fed’s longer-run interest rate forecast — which has been the reference point for 30-year Treasury yields for some time — is unchanged at 2.5 per cent.
“As always given the importance of the Fed to global markets, there were immediate reactions across asset classes.”
What about Australia?
Down under, the Reserve Bank of Australia (RBA) said it has some of its own monetary policy decisions to make, though no changes have been confirmed just yet.
RBA Governor Philip Lowe said while Australia’s economic recovery has been strong in the aftermath of the COVID-19 pandemic, the country is still in this “recovery phase”.
“It is time, though, to be thinking about how we transition from recovery mode to expansion mode and consider the issues that will affect that transition,” Mr Lowe said.
He said the RBA is reviewing several scenarios that could influence Australia’s cash rate, with some of these scenarios meeting the conditions for a rate hike in 2024, and others not.
The ASX has largely followed Wall Street’s red footsteps today, with the benchmark ASX 200 index slipping 0.6 per cent in early action to 7343 points.
However, early afternoon trade has brought about a slight recovery, with the index down 0.7 per cent at 7381 at 1:26 pm AEST.