Wall Street tumbles on inflation fears, setting up the ASX for heavy losses

The latest move by the Fed to raise interest rates by a half-percentage point had been widely expected. Markets steadied this week ahead of the policy update, but Wall Street was concerned the Fed might elect to raise rates by three-quarters of a percentage point at its next meeting. Powell eased those concerned, saying the central bank is “not actively considering” such an increase.

The central bank also announced that it will start reducing its huge $US9 trillion ($12.7 trillion) balance sheet, which consists mainly of Treasury and mortgage bonds, starting June 1. Those large holdings are a policy tool the Fed uses to keep long-term interest rates, like those on mortgages, low.

When Powell said the Fed wasn’t considering a mammoth increase in short-term rates, that sent a signal to investors to send stock prices soaring and bond yields tumbling. A slower pace of interest-rate hikes would mean less risk of the economy tipping into recession, as well as less downward pressure on prices for all kinds of investments.

The Fed’s aggressive shift to raise interest rates has investors worrying about whether it can pull off the delicate dance to slow the economy enough to halt high inflation but not so much as to cause a downturn.

But diminishing the odds of a 0.75 point hike doesn’t mean the Fed is done raising rates steadily and sharply as it fights to tame inflation, not even close. Economists at BNP Paribas still expect the Fed to keep hiking the federal funds rate until it reaches a range of 3 per cent to 3.25 per cent, up from zero to 0.25 per cent earlier this year.

“We do not think this was Chair Powell’s intention,” economists at BNP Paribas wrote in a report, citing the market’s jubilance on Wednesday, “and we reckon we could see coming ‘Fedspeak’ seek to re-tighten financial conditions.”

The Bank of England on Thursday raised its benchmark interest rate to the highest level in 13 years, its fourth rate hike since December as UK inflation runs at 30-year highs.

Energy markets remain volatile as the conflict in Ukraine continues and demand remains high amid tight supplies of oil. European governments are trying to replace energy supplies from Russia and are considering an embargo. OPEC and allied oil-producing countries decided Thursday to gradually increase the flows of crude they send to the world.

Higher oil and gas prices have been contributing to the uncertainties weighing on investors as they try to assess how inflation will ultimately impact businesses, consumer activity and overall economic growth.

The latest corporate earnings reports are also being closely watched by investors trying to get a better picture of inflation’s impact on the economy. Cereal maker Kellogg rose 4per cent after reporting encouraging financial results. Etsy stumbled 17per cent after giving a weak forecast.

Twitter rose 2.7 per cent after Tesla CEO Elon Musk said he had secured more backing for his bid to take over the company.

Technology companies had some of the biggest losses and weighed down the broader market, in a reversal from the solid gains they made a day earlier. Internet retail giant Amazon slumped 7.6 per cent and Google’s parent company fell 4.8 per cent.

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Homebuilders fell broadly as average long-term home loan rates climbed. DR Horton slide 5.8 per cent.

The average rate on a 30-year fixed-rate mortgage rose to 5.27 per cent this week, its highest level since 2009, according to mortgage buyer Freddie Mac. A year ago, it averaged 2.96 per cent. Mortgage rates tend to follow moves in the 10-year Treasury yield. The sharp increase in mortgage rates has strained affordability for homebuyers after years of sharply rising prices.

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