Overnight, the US Federal Reserve decided to take the major step of cutting its interest rate by 0.5%. What does this mean for ASX shares?
That’s a big move considering most economists were only expecting the US Fed to reduce interest rates by 0.25%.
Why was there such a large cut?
US inflation is on track
The Federal Reserve committee said it has “gained greater confidence that inflation is moving sustainably toward 2%, and judges that the risks to achieving its employment and inflation goals are roughly in balance.”
Job growth in the US has slowed, and the unemployment rate has “moved up but remains low”, according to the committee.
Jerome Powell, the Chair of the Federal Reserve, said:
We’re trying to achieve a situation where we restore price stability without the kind of painful increase in unemployment that has come sometimes with this inflation. That’s what we’re trying to do, and I think you could take today’s action as a sign of our strong commitment to achieve that goal.
The expectation for inflation in 2024 to 2.3%, down from 2.6%. The Fed committee expects the long-run neutral rate to be around 2.9%.
After this, the S&P 500 (INDEXSP: .INX) – 500 of the biggest businesses listed in the US – finished the day lower by 0.3%.
For US and global investors, the question is – why did the Fed decide to implement such a large cut? Are there signs that the US economy is starting to suffer? Is the US inflation picture now solved? Was there any political motivation?
What does this mean for ASX shares?
Probably not much, in my mind.
Markets were already expecting the US Fed to start cutting rates, so it wasn’t much of a surprise.
I don’t think it’s going to affect the RBA’s thinking much – US inflation is lower than Australia’s and the Australian job market continues to be strong. The RBA has more of a job to do.
Interest rates are somewhat important for valuations, but we also shouldn’t focus too much on macroeconomic/wider economic things. I think the last four years has shown that – invest in good investments at prices that make sense and the rest should take care of itself over time.
Hopefully there isn’t a resurgence of inflation in the US or Australia following this move by the US Federal Reserve.
It’s hard to find good value ASX shares investments at the moment considering how high some share prices are, with profit growth rates that don’t quite match. I’m looking at long-term, dependable investments like Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) that could keep growing regardless of what’s going on with the global economy.