ASX rises after US Federal Reserve hikes key interest rate by 0.75pc, UK set for rate rise, and Australian dollar surges above 70 US cents

The Australian share market has jumped up after the US central bank raised its key interest rates by three quarters of a percentage point, to curb the highest consumer inflation in four decades, and the Australian dollar has soared above 70 US cents. 

The Federal Reserve increased its federal funds rate by 0.75 per cent in its biggest hike since 1994, to fight surging price rises caused by the war in Ukraine, pent-up consumer demand after COVID-19 lockdowns and global supply chain issues. 

Its latest move takes the Fed’s key interest rate target range to 1.5 per cent to 1.75 per cent, with investors relieved there was not a bigger rate rise. 

In early trade, the All Ordinaries has gained 1.1 per cent, to 6,861, while the ASX 200, the top 200 companies index, has gained 1 per cent, to 6,668. 

Banks are doing well today, with the Commonwealth Bank up 1.6 per cent.  Banks benefit from higher interest rates because they get more revenue from borrowers.

However, they have been hammered recently because of worries that rapid interest rate hikes may cause an economic downturn or a recession.

The Australian dollar shot up by more than 1 cent against the greenback overnight, gaining more than 2 per cent in value. 

At 10:30am AEST, the Australian dollar was buying around 70.3 US cents, up nearly 0.4 per cent on this morning’s opening. 

Fed forecasts 

The Federal Reserve released forecasts showing that the official rate could reach 3.4 per cent by the end of the year and 3.8 per cent next year. 

“The committee is strongly committed to returning inflation to its 2 per cent objective.” 

The committee sets monetary policy, including interest rates. 

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Federal Reserve chairman Jerome Powell said he expected the economy to slow and the unemployment rate to rise in coming months as interest rates increase, noting, “75 basis points seemed like the right thing to do at this meeting, and that’s what we did”. 

Mr Powell told journalists afterwards that the US central bank was likely to raise borrowing costs by 0.5 per cent, to 0.75 per cent next month. 

The Fed sees the economy slowing to 1.7 per cent growth this year and the unemployment rate is predicted to rise by 0.5 per cent to 4.1 per cent next year. 

And, he said, the war in Ukraine,continuing global supply chain issues, and COVID-19 lockdowns in China were fuelling inflation, were outside the control of the Federal Reserve and were creating an “extraordinarily uncertain environment.” 

Fed-induced recession? 

Mr Powell was questioned by journalists about whether aggressive interest rate hikes by the Fed could “induce” a recession. 

The Fed chairman denied rapid rate rises would cause a recession, and said the US central bank was prepared to change course swiftly if the economy slowed down too much. 

“We’re going to react to the incoming data appropriately,” he said. 

Mr Powell added that the Fed did not “seek to put people out of work” and that a soft landing was possible if inflation fell to just above 2 per cent and inflation rose to just above 4 per cent. 

Many prominent investors — such as Mohamed el Erian — want to see more rate increases to curb damaging price rises and prevent stagflation, which the World Bank calls a “toxic mix” of inflation and rising unemployment. 

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And US investor and businessman Gundlach went even further by calling on the Fed to raise official interest rates to “3 per cent tomorrow”. 

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But others are worried that a hawkish Fed could cause a recession in the US next year, they say, because rapid and large rate rises are like a “sledgehammer” that will slow the economy and drive-up unemployment.

Citi’s global chief economist, Nathan Sheets, said the Federal Reserve had a tricky decision to make: whether to accept inflation higher than 2 per cent a year or to risk driving the economy into a slowdown. 

Betashares chief economist David Bassanese predicts there will be a recession in North America over the coming year.

“Given stubbornly high US inflation and the Federal Reserve’s apparent determination to bring it down, I now foresee a US recession within the next 12 months,” he said in an economic note. 

“Specifically, I anticipate the US National Bureau of Economic Research (NBER) will, at some stage between now and end-2023, declare that a US recession began between June 2022 and June 2023.”

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Wall Street rallies

Investors were relieved that the Fed did not make an even bigger rate increase and Wall Street rallied in a night of volatile trade. 

The Dow Jones index jumped 1 per cent, to 30,669, the S&P 500 jumped 1.5 per cent, to 3,790, and the Nasdaq Composite surged 2.5 per cent, to 11,099.

“It wants higher interest rate to stave off inflation, but it also realises higher interest rates make the cost of doing business more expensive.”

ECB emergency meeting

European markets rose on expectations of a rise in rates by the Fed and the European Central Bank’s pledge that it would work to avoid a debt crisis caused by rising borrowing costs by supporting high-debt member states. 

It plans to devise a new tool to manage the risks.

Rising US borrowing costs flow through to the rest of the world and we have already seen many central banks, including Australia’s Reserve Bank, raise official interest rates to battle inflation. 

The announcement saw returns on government bonds in countries — such as Italy, Spain and Portugal — pull back. 

ECB chief Christine Lagarde played down expectations about what the central  bank would do to avert another European debt crisis. 

“Neither can we surrender to finance dominance; we have to deliver on our mandate.” 

The FTSE 100 index in London gained 1.2 per cent, to 7,273, the DAX in Germany added 1.4 per cent, to 13,485, and the CAC 40 in Paris increased by 1.4 per cent, as well to 6,030. 

UK poised for rate rise 

The Bank of England is set to raise UK interest rates to 1.25 per cent when its Monetary Policy Committee meets overnight. 

It was 2009 when rates were at 1 per cent, during the global financial crisis, when central banks bailed out the global financial system. 

Spot gold surged 1.5 per cent, to $US1834.80 an ounce, while Brent crude oil was weaker, at $US118.84 a barrel, down 1.9 per cent., after major oil producers stuck to their forecast that global oil demand will be greater than pre-pandemic levels. 

ABC/Reuters

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