Fed rate hike: What does it mean for Aussie investors and homeowners?

Highlights 

• The US Federal Reserve has implemented its first rate hike since 2018.
• The RBA might follow in the Fed’s footsteps to offer competitive pricing.
• The US and Australian stocks leapt on the Fed’s rate hike announcement as it was in line with market expectations.

Aggressive interest rate hikes are likely to be a recurring theme across nations in 2022. With pandemic-induced slowdown receding gradually, it seems to be the right time for central banks to focus on taming inflation. Inflationary pressures have been growing worldwide amidst supply-chain disruptions caused by the Russia-Ukraine war.

As the Fed implements its first interest rate hike since 2018, speculations of earlier-than-expected interest rate rise are rife in the Australian market. Experts suggest that Australia might not be completely immune to the effects of the Fed’s rate hike, despite being situated thousands of miles away. 

The US Fed has recently raised interest rates by 0.25%, much in line with market expectations. However, the decision has come alongside a rise in the central bank’s forecast for future rate hikes. Overall, the Fed’s decision was largely viewed as a “hawkish hike”, with the central bank anticipating the federal funds rate to reach 1.9% by the end of this year.

The talks of aggressive rate tightening in the US have raised concerns in Australia, where a rate hike has not occurred in over a decade. Inflation is the key issue pushing central banks to embrace a rate hike. At the same time, growing affordability concerns are beginning to outweigh the benefits of a rise in underlying inflation, such as an uptick in wages growth.

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What can homeowners expect?

The global influence of the Fed is extensive and highly understood as the US currency is a universal metric of the world economy’s well-being. Thus, any decisions taken by the Western nation usually show an effect on almost every economy across the globe.

To begin with, Australian bankers may have to offer competitive pricing to stay on the same bandwidth as the US banks. Essentially, this indicates that the RBA may soon opt for a rate hike to move in line with international trends.

However, as the Australian housing market remains a hotbed of volatility, the news of a potential interest rate rise would mean increased chaos in the sector. Mortgage holders would have to manage high inflation alongside rising mortgage payments each month. 

Fixed-rate mortgage lending has become more pronounced in Australia since the cash rate was first reduced. Holders of fixed-rate mortgages might see a jump in their monthly interest payments when the fixed term on the loan ends. For those holding a variable-rate mortgage for two years, little has changed as interest rates continue to remain at a record-low level for about 16 months now.

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Should investors worry?

The US bond yields marked an uptick following the interest rate hike announcement. Additionally, there is considerable historical evidence suggesting that an interest rate hike is usually followed by increased volatility in the share market.

The recent surge in bond yields indicates investors’ growing belief that the Russia-Ukraine war may not slow the momentum towards interest rate hikes. These same factors can arise back home in Australia after the Fed’s decision.

Interestingly, the immediate impact of rate hikes was visible in equity markets and was surprisingly upbeat. The US and Australian markets responded positively to interest rate hikes as it was largely in line with market expectations. The Australian dollar also jumped following the news. Some market experts predict that talks of an economic slowdown will build up in Australia alongside rate hikes. 

A rate hike in Australia could add further uncertainty to the return on equity investments. While certain types of stocks perform well during an inflationary environment, it also silently eats the returns obtained on investments. However, fixed-interest asset holders might be able to ward off some ill-effects of inflation.

Bottom Line

Inflation has increasingly become a resonating trend across economies due to the peculiar timing of global events. The RBA had acknowledged that an uptick is needed in its inflation forecast for the coming months. As commodity shortage plagues the world, this revision in the forecast might be more vigorous.

While additional pressures have been added to the RBA’s shoulder after the Fed’s rate hike, it is no surprise that the central bank cannot escape rising inflation. Thus, a rate hike seems imminent in the coming months and would be most likely followed by multiple rate hikes in the subsequent months.

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