ASX set to fall after US Fed signals rate rise ‘soon’

Stocks fell, giving up their gains from an early rally, and Treasury yields climbed on Wednesday 9US time) as investors weighed the Federal Reserve’s decision to leave its key interest rate unchanged, while signalling that it plans to begin raising interest rates “soon” as the central bank moves to fight inflation.

In a statement issued after its latest policy meeting, the Fed said it “expects it will soon be appropriate” to raise rates. Though the statement didn’t specifically mention March, half the Fed’s policymakers have expressed a willingness to raise rates by then, including some members who have long favoured low rates to support hiring.

The S&P 500 was down 0.6 per cent in late trade. The benchmark index had been up 2.2 per cent earlier in the day. The Dow Jones Industrial Average was down 0.6 per cent and the Nasdaq slipped by 0.1 per cent.

The Australian sharemarket is set to fall, with futures at 7.23am AEDT pointing to a drop of 51 points, or 0.7 per cent, at the open to 6869.

The Fed also said it would phase out its monthly bond purchases, which have been intended to lower longer-term rates, in March.

Stock indexes initially rose, then eased back to just below where they were before the Fed’s statement was released, then flipped into the red as Fed Chair Jerome Powell took repeated questions about how and when the central bank will start letting its balance sheet shrink after buying trillions of dollars of bonds through the pandemic.

Powell said several times that policy makers have not set a timetable for when it will start reducing its balance sheet and that the Fed sees short-term rates as the main lever it will use to adjust monetary policy. But he also acknowledged that the balance sheet is substantially larger than it needs to be and that the economy no longer needs to have such highly supportive action.

The Fed’s actions are sure to make a wide range of borrowing — from mortgages and credit cards to auto loans and corporate credit — costlier over time. Those higher borrowing costs, in turn, could slow consumer spending and hiring. The gravest risk is that the Fed’s abandonment of low rates could trigger another recession.

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ASX futures up 1 point to 6921 at 6.50am AEDT

• Australian dollar -0.5% to 71.13 US cents at 7.05am AEDT
• Wall Street (in late trade): S&P 500 +1.3%, Dow Jones -0.1%, Nasdaq +0.9%
• Europe: Stoxx 50 +2.1%, FTSE +1.3%, DAX +2.2%, CAC +2.1%
• Bitcoin +0.9% to $US37,302.36 on Bitstamp at 7.06am AEDT
• Spot gold -1% to $US1828.90 per ounce at 6.21am AEDT
• Brent crude +2% to $US90.00 a barrel at 6.19am AEDT
• US oil +2.1% to $US87.39 a barrel
• Iron ore +0.2% to $US138.10 a tonne
• 10-year yield: US 1.80% Australia 1.94% Germany -0.07%