ASX 200 shares slump amid Fed 5% fears

S&P/ASX 200 Index (ASX: XJO) shares are facing some fresh headwinds on Thursday.

In early morning trade, the benchmark index is down 0.4% having earlier posted losses of 0.6%.

That also happens to be how much the S&P 500 Index fell overnight in US markets.

The reason for the slump in the ASX 200?

You guessed it.

The US Federal Reserve.

ASX 200 shares slump amid Fed 5% fears

Inflation in the world’s top economy has begun to show some signs of slowing down. (See here.) That news saw US stocks and the ASX 200 close well into the green yesterday.

But the US labour market remains tight. And services inflation was one of the areas that saw a significant uptick in November.

With the US central bank determined to get inflation back to its 2% target range, the Federal Open Market Committee (FOMC) unanimously voted to increase the benchmark interest rate by 0.50% points to a range of 4.25% to 4.50%.

The latest rate hike impacting US stocks and ASX 200 shares today comes on the heels of four consecutive 0.75% increases.

The half percentage point increase was widely expected. But markets look to be sliding based on some hawkish words from Fed chair Jerome Powell, who indicated rates are likely to go higher than the market has priced in for 2023.

The Fed forecast that the official interest rate would reach 5.1% next year, higher than prior consensus forecasts. Rates would then fall to 4.1% in 2024, also above previous indications.

What did the Fed say?

ASX 200 investors look to have taken aboard the reality that interest rates in the world’s biggest economy won’t be coming down anytime soon.

According to Powell (quoted by Bloomberg):

We still have some ways to go… I wouldn’t see us considering rate cuts until the committee is confident that inflation is moving down to 2% in a sustained way. Restoring price stability will likely require maintaining a restrictive policy stance for some time…

It is our judgment today that we are not at a sufficiently restrictive policy stance yet. We will stay the course until the job is done.

Commenting on the latest interest rate hike impacting ASX 200 shares and stock markets across the Asia-Pacific area today, Kerry Craig, global market strategist for JPMorgan Asset Management said:

The fabled Fed pivot may take longer than the market had been expecting. US equities didn’t react favourably to the outcome of the meeting and that sentiment is likely to flow into APAC markets.

For APAC, the China reopening story remains a tailwind but the degree that this will be able to offset the higher rates and still support USD remains to be seen.