The US Federal Reserve has lifted rates by 75 basis points (bps) for the fourth consecutive month, taking the fund's target range to 3.75 to 4 per cent.
The hike forms part of a monetary policy tightening cycle aimed at curbing inflation, which currently sits at 8.2 per cent.
However, the Federal Reserve has hinted at reducing the size of future rate hikes as it observes the broader impact of its previous rate rises.
“In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments,” the Federal Open Market Committee (FOMC) noted in its monthly statement.
“…In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook.
“The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals.”
According to ING Economics, the Federal Reserve’s latest statement represents a “key shift” in strategy but added that it does not mean rate hikes are “going to stop soon”.
“Chair Powell in the press conference highlighted an important distinction between the pace of rate hikes and what will be the ultimate, or terminal, rate level,” ING Economics observed.
“Indeed, he commented that the Fed doesn't want to fail to tighten enough and loosen too soon.”
The Federal Reserve stated it is seeking to achieve a stance of monetary policy that is “sufficiently restrictive to return inflation to 2 per cent over time”.
ANZ Research is forecasting a 50 bp hike in December and 25 bp hikes in February and March 2023 — taking the US funds rate to 4.75 to 5 per cent.
This is expected to result in the “moderation of core inflation” over the fourth quarter of the 2022–23 financial year.
The Federal Reserve’s rate hikes have triggered a global wave of monetary policy tightening, including in Australia, where the Reserve Bank recently lifted the cash rate for the seventh consecutive month to 2.85 per cent.
But according to Russel Chesler, head of investments and capital markets at VanEck, the Australian economy remains in a “better position”, benefiting from “strong commodity prices, low unemployment and robust consumer spending”.
Australia’s economic posture, he added, would soften the blow of a potential downturn in the US economy next year.
“We expect the Australian equity market to continue to outperform the US; lower but still elevated commodity prices and full employment bode well for Australia, which we expect will have a soft landing even with rising interest rates,” Mr Chesler said.
“Increasing interest rates have a heavier effect on growth and particularly technology stocks, where the ASX is quite underweight.”
[Related: Rate hikes risking market ‘crisis’]
