Your investment future pivots on 4am Thursday

US Fed Reserve head Jerome Powell will announce another official interest rate hike at 4am on Thursday and it will have an immediate impact on global financial markets.

One day to go to the decision which is essentially going to drive what happens to your investments – most directly shares, but also property, and your super in general – into 2023 and beyond.

At 4am our time, before dawn downunder, Fed head Jerome Powell will announce the latest official interest rate increase.

Strictly speaking it’s for the US; in reality it’s for the entire world.

The decision will drive Wall St in the two hours of trading left in New York, and that will flow straight into our market Thursday.

Sorry, would have flown straight in, but of course the PM chose Thursday for his public holiday to remember and celebrate the Queen.

It’s a small but also big point: in choosing Thursday when it could have been any day, the PM showed a total lack of understanding about the world of business and finance, far less care for your best financial interests.

There is no doubt the Fed will hike; the question is how much?

The ‘experts’ have coalesced around 75 points – given the ‘horror’ description of a ‘triple-hike’. As if 25 points was somehow written in stone somewhere as ‘the normal’.

Some are predicting that the tough-talking Powell will deliver a 100-pointer. I wouldn’t entirely rule out only a 50-pointer from the ‘talk loudly and carry a small stick’ Powell.

Whatever Powell delivers will have an immediate market impact. A 100-pointer could send the Dow down 1000 points; he (unlikely) 50-pointer send it up 1000 points.

The immediate reaction to a 75-pointer – up or down – will pivot crucially on the accompanying words; and also the Fed’s forecasts for both inflation and its own interest rate through 2023 and 2024.

US Federal Reserve Board Chairman Jerome Powell. (Photo by MANDEL NGAN / AFP)

Also key is what it says about its unwinding of all the massive money printing done not just since Covid but back to the GFC.

This goes to the longer-term dynamic. These words and music, so to speak, will drive where Wall St goes – both share prices and bond yields – well into 2023.

Obviously, subject to what actually happens in the global economy and world financial system along the way; and indeed how the Fed then interprets and responds to all that.

Every Fed decision – they come every six weeks, in contrast to our Reserve Bank’s monthly meetings – has this impact: in the immediate two hours of trading on Wall St, and then shaping longer-term investment dynamics.

Two things make this meeting, this decision, and what the Fed says or implies about the future, so dramatically climactic.

The Fed has already raised rates significantly, albeit from zero – starting (late) in March with a piddling 25-pointer, then a 50-pointer and then two 75-pointers.

Each of the possible decisions Thursday therefore would have significant reverberations about how the Fed sees the world; what it thinks it will do going forward; and what it might actually end up doing.

The second big thing making it so climactic is that the US economy might be right on the edge; further aggressive rate hikes might tip it into not just recession but serious recession.

For investors, including our downunder ones, this is not just an argument over whether the rates are ‘right’, but what it points to the Fed doing – maybe doing a complete 180 - early next year, or even at a stretch in December.

As I’ve explained over the years, unlike the Fed, our RBA never thinks about the share market in making its decisions, and those decisions don’t impact the market the way the Fed’s do Wall St.

Yes, it thinks – peripherally and indirectly – about the possible impact on property; and the Fed’s impact on the US and global economy.

Both – what the Fed does and what our RBA does – will mix to drive the property market.

Originally published as Your investment future pivots on 4am Thursday