Markets behaving cautiously ahead of key interest rate decision

The XJO index of Australia’s largest 200 listed companies is struggling to push past the key 5950 point level, as Australian shares look nervous ahead of a key US interest rate decision.

Uncertainty over the timing and pace of US interest rate rises is causing stock markets around the world to trade nervously, particularly some utilities companies and companies with large borrowings. These sorts of shares are sometimes treated as “bond proxies” which means their share prices fall as bond prices fall (bond yields rise as bond prices fall).

The US Federal Treasury reserve is expected to raise their funds rate from 1.5 percent to 1.75 percent, which would be the first of a predicted three or four rate rises this year.

Financial markets had been predicting three raises of the funds rate target this year, as US interest rates are slowly being lifted after nearly a decade of exceptionally low rates.

However, Jerome Powell, President Trump’s new Fed Chair, has proved to be more “hawkish” than many have expected – and may be signalling an intention of four rate rises this year.

Interest rates around the world are starting to rise, as central bankers try to cool a global economy that is as strong as at any point in the past decade. Interest rate rises are often used to try to stem rising inflation – which can be caused by strong economic activity.

Higher interest rates also give central bankers ammunition during economic downturns, because it gives them more room to move the interest rate lower. Lowering interest rates can have a stimulatory effect on the economy – and can help to dampen the effects of weakening economic activity.

Traders and Investors will be watching intently tonight, not just to see a potential Funds Rate rise, but also for any language that will indicate a fourth rise this year.