ASX Expected to Decline Following US Market Losses and Fed Rate Hike

US stocks slipped after the Federal Reserve hiked its main interest rate for the first time in three years and suggested more may be ahead as it tries to get the nation’s high inflation under control.

The S&P 500 fell 0.4 per cent after giving up a modest gain from earlier in the day. The Dow Jones Industrial Average dropped 631 points, or 1.2 per cent, and the Nasdaq composite was nearly unchanged after edging down by less than 0.1 per cent.

The Australian sharemarket is set to decline sharply, with futures at 6.21am AEST pointing to a fall of 68 points, or 0.8 per cent, at the open. The ASX added 0.3 per cent on Wednesday.

Investors generally prefer lower interest rates because higher rates slow the economy’s growth and undercut prices for stocks and other investments.

The US stock market initially held onto its modest, early gains after the Fed announced its decision. The short-term pain of a slower economy may be worth it if it starves inflation of its fuel and gets further increases for the cost of living back to the Fed’s 2 per cent target.

But stock prices weakened later in the day as Fed Chairman Kevin Warsh said repeatedly in a press conference that inflation remains too high and the US economy appears to be strengthening. That could imply the economy is solid enough to withstand more hikes to rates, and other officials at the Fed provided their own forecasts suggesting rates may need to go still higher.

The median Fed official expects the federal funds rate to end this year at 4.1 per cent, according to forecasts published after the central bank’s meeting. That’s up from its current range of 3.75 per cent to 4 per cent following Wednesday’s increase, and it’s up from the median forecast of 3.8 per cent that Fed officials gave three months ago.

Traders, meanwhile, suspect the Fed may go even further. They’re betting on a 38 per cent probability the Fed could hike the federal funds rate to a range of 4.25 per cent to 4.50 per cent by the end of the year, according to data from CME Group.

“Our decision comes at a time when the American economy appears to be strengthening,” Fed Chairman Kevin Warsh said in his press conference.

He pointed to solid US hiring trends, corporate profits and investments by businesses. A report on Wednesday morning, meanwhile, showed shoppers spent much more at US retailers last month than economists expected.

“The plain fact is that inflation is too high and has been for too long,” Warsh said. He later added, “Today’s action starts to show we’re serious about this.”

It’s the first hike by the Fed to interest rates in three years. The central bank had been on pause for months following cuts to rates in 2024 and 2025, even though inflation has consistently remained above the Fed’s 2 per cent target.

President Donald Trump has been lobbying for interest rates to go lower rather than higher.

On Wall Street, bank stocks fell to some of the market’s sharper losses. A slower US economy could mean less demand for loans from them. Banks also get hurt when the gap narrows between short-term interest rates and longer-term ones because the industry makes profit off the difference.

Following the Fed’s announcements, the two-year Treasury yield jumped to 4.74 per cent from 4.67 per cent late Tuesday. It tends to closely follow expectations for what the Fed will do with the federal funds rate.

The yield on the longer-term 10-year Treasury, meanwhile, takes into account expectations for economic growth and inflation years down the line. It had a more modest increase, ticking up to 5.01 per cent from 5.00 per cent late Tuesday.

Huntington Bancshares fell 5.6 per cent, Citizens Financial Group sank 4.8 per cent and JPMorgan Chase slipped 1 per cent.

The largest loss in the S&P 500 came from J.B. Hunt Transport Services, which lost 13.3 per cent. Its chief financial officer told a conference of analysts late Tuesday that it’s facing higher costs and expects its earnings to drop 5 per cent to 10 per cent from the second quarter to the third.

Stocks of oil companies also weighed on the market after the price for a barrel of Brent crude fell 2.7 per cent to $105.83. It was the first drop of the week for Brent, which has gotten near $110 in recent days.

Helping to limit the market’s losses were gains for some influential stocks in the artificial-intelligence industry.

Nvidia rose 0.8 per cent, and Advanced Micro Devices climbed 1.6 per cent to recover more of their losses from earlier in the week. AI stocks slid worldwide Monday after leaders of the AI industry called for a slowdown in development to address safety issues for humanity.

All told, the S&P 500 fell 33.92 points to 7,551.81. The Dow Jones Industrial Average dropped 631.21 to 51,461.90, and the Nasdaq composite slipped 3.15 to 25,978.42.

In stock markets abroad, indexes rose across much of Europe and Asia. South Korea’s Kospi climbed 1.4 per cent for one of the world’s biggest gains.

Inflation is a worldwide problem, and the European Central Bank hiked rates last week to help diminish it.

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