A few days ago the American stock market saw massive falls over fears the US Federal Reserve would raise interest rates and spark a recession.
Today, it raised rates by three-quarters of a percentage point, with the key interest rate target range of 1.5 to 1.75 per cent — which was exactly what investors were fearing.
But we didn’t see another dark day on Wall Street off the back of that news — in fact, US stock market index the Dow Jones was up 1 per cent when it closed.
And when the Australian stock market opened this morning, it was up by more than 1 per cent in the first hour of trade.
Why did the stock market bounce back if rates went up?
Partially because they didn’t go up any higher than anticipated.
But also because, while hinting the next rate rise could be by either half or three-quarters of a percentage point, Federal Reserve boss Jerome Powell suggested future rate rises won’t be as steep:
“Today’s 75 basis point increase is an unusually large one and I do not expect moves of this size to be common.”
So that would have given investors more confidence, which was what really fuels the stock market.
And because what happens on the US stock market impacts what happens on our share market operator, the Australian Securities Exchange (ASX), local shares also rallied.
Has this canceled out the ASX losses from earlier this week?
On Thursday, the ASX200, which is a measure of how well the Australian stock market is doing based off the top-performing 200 companies, went down despite the morning gains.
So even though it went up by more than 1 per cent earlier in the day, by the time it closed, it was down 0.15 per cent.
On Wednesday, it closed down by 1.27 per cent.
And on Tuesday it closed down by 3.55 per cent.
Over the last five days, the ASX200 has lost 6.11 per cent.
Will there be more losses?
Here’s ABC business reporter Sue Lanin:
“A number of investment advisers, both globally and locally, think there will be more pain on global markets because higher interest rates will slow the economy and hurt confidence.”
Are people still worried about a recession?
Mr Powell told reporters he didn’t think future rate rises would cause a recession in the US and, if it looked like the US was about to tip into a recession, he said the US central bank was prepared to change course swiftly.
But others are less confident.
Betashares chief economist David Bassamese thinks the US could go into recession in the next year.
The US economy is the biggest in the world and if it dips into recession, the rest of the world is likely to follow.
Here’s what Mr Bassamese had to say on Australia’s chances of a recession:
“While I am still hopeful the Australian economy can avoid recession, it is at least a 40 per cent risk in the coming 12 months.
“Either way, our share market will likely follow the US into bear market territory.”
A bear market, by the way, is just stock market slang for a market slump.
Technically, it’s when the value of shares has fallen by 20 per cent or more from a recent high over a sustained period of time.
What could tip us into a recession?
Let’s go back to Lannin again:
“A recession is possible in Australia if the Reserve Bank raises interest rates too quickly and that causes a sudden slowdown in the economy.
“Aggressive interest rate hikes make the cost of borrowing more expensive.
“That basically stops lending in its tracks because the cost of paying back a mortgage has suddenly jumped by hundreds of dollars a month (depending on the size of your mortgage).
“It also means that businesses are less reluctant to borrow because interest rates are higher.
“So that is how higher interest rates curb inflation by making the cost of living more expensive. Higher prices mean that people stop spending so much.
So interest rates need to go up to slow down spending to slow down inflation—which ultimately will make the cost of living cheaper.
But if interest rates go up too quickly, they could make people stop spending altogether and grind the economy to a halt.
And that’s when we could go into a recession.
So we’re keeping our eyes on inflation and interest rates as key figures. Here’s where they’re at:
- Australia: 5.1 percent
- US: 8.6 percent
- Australia: 0.85 percent
- US: The target range is 1.5 per cent to 1.75
Interest rate forecast:
What actually is a recession?
There are a lot of different definitions, but it’s generally when the economy shrinks rather than grows.
The term “technical recession” describes two consecutive quarters of declines in gross domestic product (GDP) — which is the value created by the goods and services produced within the country.
Essentially, it often means people don’t spend as much, the unemployment rate goes up and share prices tend to drop.
Here’s Mr Bassamese on that:
“For investors, periods of US recession and associated bear markets can be difficult periods to endure.
“But the lesson of history is that markets do eventually bounce back.”
ABC with Wires