ASX rallies as US Federal Reserve bumps up interest by 0.75 per cent

The US Federal Reserve has hiked interest rates by 0.75 per cent amid the troubling acceleration of inflation — but it’s not all bad news for the global market.

The Australian stock market is rebounding today after the US Federal Reserve hiked interest rates by 0.75 per cent amid the troubling acceleration of inflation.

The hike is the most aggressive rise the US has seen in nearly three decades. The last 75-basis-point increase was in November 1994.

The US central bank seemed set to increase the benchmark interest rate again by 0.5 percentage points, but a resurgence of consumer and producer prices in May fuelled growing speculation of a 75-basis-point hike.

Jerome Powell, chair of the federal reserve, said he expected the rate would continue to rise, as the nation continues to battle a rise in inflation well beyond what was earlier predicted.

“Clearly, today’s 75 basis point increase is an unusually large one and... either a 50-basis-point or a 75-basis-point increase seems most likely at our next meeting,” Powell told reporters after the decision was announced.

Powell reiterated that the central bank was “moving expeditiously” to address inflation.

“Inflation has obviously surprised to the upside over the past year — and further surprises could be in store,” Powell admitted.

“We therefore will need to be nimble in responding to incoming data and the evolving outlook.”

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Federal Reserve chair Jerome Powell said more significant rate rises were on the way after announcing the nation's biggest increase since 1994. Picture: AFP

Australia’s surprising reaction to the hike

The Australian market is bouncing back after Tuesday’s $116 billion ASX wipe-out and further losses on Wednesday.

There were concerns about a further smashing of the Aussie market because of the decision overnight, but there are actually positive signs emerging for today at least.

It’s all because Wall Street stocks rallied this morning after the Fed decision in hopes that inflation can be countered without prompting a recession.

It had been a rocky day of trading, but the market’s broad-based S&P 500, which entered a “bear market” earlier this week following the latest inflation data, gained 1.5 percent.

This means moderately good news for Australian investors.

The benchmark S&P/ASX 200 jumped 1.1 per cent by 11am, recouping some of the week’s heavy losses.

Big miners, banks and telcos are doing well with BHP up 1.7, CBA up 1.5, Goodman up 3.8, and Telstra up 2.4 per cent.

There has also been a surprising jump for the Australian dollar, which leaped by more than 1 cent, to a high of 70.24 US cents.

At 6am, the Aussie dollar currency had surged 2 per cent to just above 70 US cents.

The positivity stems from the fact that Mr Powell said 75 basis point increases will not be the new normal, easing concerns of a potential series of similar increases.

Bitcoin bounces back

Cryptocurrency leader bitcoin is trading higher after recovering from a slamming following the US Fed’s decision.

Bitcoin fell over 5 per cent immediately after the decision but rebounded and is at $US21,878.35, up 1.4 per cent, as the broader crypto market also mirrors enthusiasm shown on the share market.

Ethereum is up 2.6 per cent to $US1192 while binance coin is 2.8 per cent stronger at $US222.85.

Biden endorses rate hike

Some economists argue that a 75-basis-point rise in the US is an aggressive step that indicates rising panic among policymakers who are usually reluctant to surprise financial markets.

Others argue the Fed is behind the curve and needs to react strongly to prove its resolve to combat inflation.

President Joe Biden has fully endorsed the Fed’s battle against the steepest rise in prices in more than 40 years, as he watches inflation erode his popularity and deflect attention from other milestones, including a rapid recovery of the world’s largest economy and record job growth.

US President Joe Biden has fully endorsed the Fed’s battle against inflation. Picture: AFP

Clear signals

US central bankers began raising interest rates off zero in March as buoyant demand from American consumers for homes, cars and other goods clashed with transportation and supply chain snarls in parts of the world where Covid-19 remained — and remains — a challenge.

That fuelled inflation, which got dramatically worse after Russia invaded Ukraine in late February and Western nations imposed steep sanctions on Moscow in response, sending food and fuel prices up at a blistering rate.

US gasoline prices have topped $US5 a gallon for the first time ever and are setting new records daily.

Economists thought March was the peak for consumer price hikes, but the rate spiked again in May, jumping 8.6 per cent in the latest 12 months, and wholesale prices surged as well, almost entirely due to soaring costs for energy, especially gasoline.

The Fed was caught off guard with the speed of the price increases, and while policymakers usually like to clearly signal any policy shift to financial markets, the latest data likely changed the calculus.

Rising inflation in the US has sent shockwaves through the ASX which has seen big losses this week.

Powell had indicated policymakers were poised to implement another half-point increase in the benchmark borrowing rate this week and another next month, aiming to douse red-hot inflation without tipping the economy into recession and avoid a bout of 1970s-style stagflation.

“The 75bp hike … will be about making people/markets believe that they’re serious about continuing to have higher rates in 2023,” Harvard economist and former White House advisor Jason Furman tweeted.

Markets are now pricing in at least one three-quarter-point hike by the end of the year and an aggressive path at the other four meetings.

The Labor Department announced on Monday that consumer prices in the US rose 8.6% last month from a year earlier. Picture: Spencer Platt/Getty Images

But neither the Fed nor the White House can have much immediate effect on many of the factors driving the price increases.

Biden on Tuesday blamed Russia for inflation, which is afflicting countries worldwide, and criticised Republicans for blocking his efforts to help American families feeling the pain.

Inflation is “sapping the strength of a lot of families,” he told trade unions in Philadelphia. “Republicans in Congress are doing everything they can to stop my plans to bring down costs.”

Originally published as ASX rallies as US Federal Reserve bumps up interest by 0.75 per cent