Fed signals rate hike in March; what are implications for Australia?

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Fed signals rate hike in March; what are implications for Australia?

 Fed signals rate hike in March; what are implications for Australia?
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Highlights 

  • The US Fed has finally signalled that an interest rate hike could come in March.
  • The rate hike signal from US Fed triggered the benchmark ASX 200 index to dive into a correction mode.
  • Investors would now be closely tracking the Reserve Bank of Australia’s (RBA) monetary policy scheduled in February.

The US Federal Reserve has finally signalled that an interest rate hike could come in March. The US central bank's Federal Open Market Committee has also reaffirmed its plans to end its bond purchases in the same month as part of its sustained fight against rising inflation.

"The committee is of a mind to raise the federal funds rate at the March meeting assuming that the conditions are appropriate for doing so," Fed Chief Jerome Powell said in a news conference after releasing the policy statement.

The Fed’s rate hike update triggered a sell-off on Wall Street. US stocks fell as Fed Chair Jerome Powell refused to rule out more aggressive tightening to contain surging prices. The S&P 500, which was trading over 2% at one point during Wednesday’s trading session, ended 0.15% lower. Nasdaq closed the day on a flat note. Furthermore, yields on longer-dated Treasury securities, sensitive to the Fed's balance sheet policy, climbed fast.

Image Source: © Lucidwaters | Megapixl.com

How did the Australian market react?

On expected lines, the benchmark ASX 200 dived into a correction, driven by tech and gold stocks. The ASX 200, which had started the session in the green, closed lower for a fourth straight day, down 1.8% at 6,838.3 on 27 January 2022 - its lowest since April last year. The index is now more than 10% below its August 2021 high.

All eyes on RBA’s upcoming meet

Following the increased rate hike expectations in the US, investors would be closely tracking the Reserve Bank of Australia’s (RBA) monetary policy scheduled in February. Some experts are of the view that the Australian central bank may tighten monetary policy sooner than expected after the annual inflation touched a three-decade high in the fourth quarter. Thus, the upcoming RBA meet is of critical significance for investors, especially after Fed’s latest update.

Bottom Line

Investors are certainly on the tenterhooks fearing rate hike after four decades of successively lower interest rates. In addition, geopolitical risks especially the evolving Russia-Ukraine scenario would keep the market volatility high. While this may be a good opportunity for dip buyers, most technical charts suggest the bottom is yet to come.

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