The ASX dropped sharply and the two-year US Treasury yield, which reflects interest rate expectations, rose as far as 3.46 per cent on Monday, the highest in 15 years.
Australian shares dropped sharply on Monday after US Federal Reserve chairman Jerome Powell and other central bank officials reiterated they will continue to raise interest rates to defeat inflation, disappointing investors agitating for rate cuts in 2023.
Mr Powell spoke at the annual policymakers’ gathering hosted by the Kansas City Fed in Jackson Hole, Wyoming. This year’s theme was how the COVID-19 pandemic put new constraints on the world economy.“Powell’s comments at Jackson Hole were hawkish, as he invoked former chair Paul Volcker in advocating against premature loosening in policy in response to weaker growth,” said Mr Kenny.
The rise in short-term interest rates further inverted the yield curve, which is seen as a reliable indicator of recession. The gap between yields on two- and 10-year Treasury notes widened to minus 36 basis points, from minus 31 basis points before the Fed chairman’s address.Mr Powell gave no indication of how high interest rates might rise before the Fed is finished, only that they will move as high as needed as it seeks to bring down inflation to its 2 per cent target.
Elliot Clarke, a senior economist at Westpac, expects a 0.5 percentage point lift in September, assuming growth in non-farm payrolls slows, and the August CPI result is “benign”.“Even if both outcomes are as we expect and the FOMC hikes by 50 basis points in September, a 50 basis point move in November will remain a material risk.”
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