Global stocks drop after Fed signals tighter monetary policy

Global stocks and crude oil dropped after the Federal Reserve signalled tighter monetary policy could come earlier than expected, with the US central bank forecasting significantly higher inflation this year.

Japan’s Topix index fell 0.6 per cent and Australia’s S&P/ASX 200 shed 0.3 per cent in Asia-Pacific trading on Thursday. Futures for Wall Street’s S&P 500 index were down 0.3 per cent, while those for London’s FTSE 100 slipped 0.5 per cent.

The weakness across equity markets came after the Fed kept its main interest rate on hold at the 0 to 0.25 per cent range on Wednesday. But the consensus among Fed officials shifted towards a rise in rates in 2023, pushed forward from a previous forecast of 2024 at the earliest.

Core inflation is expected to be 3 per cent this year, sharply higher than the 2.2 per cent expected in March, according to Fed officials’ estimates.

US Treasury yields, which rise as prices fall, steadied after jumping in the wake of the Fed’s announcement. Yields on 10-year US Treasuries held steady at 1.579 per cent in Asian trading after rising almost 0.1 percentage points in the previous session. The S&P 500 closed 0.5 per cent lower on Wednesday.

Jay Powell, Fed chair, said there was “every reason to think that we’ll be in a labour market with very attractive numbers, with low unemployment, high participation and rising wages across the spectrum”.

The Federal Open Market Committee also kept its asset purchasing programme, introduced last year to cushion the economic blow from Covid-19, unchanged at $120bn per month. Powell said the process of winding down the programme would be “orderly, methodical and transparent”, adding that any changes would be signalled “well in advance”.

“We don’t think that tapering the programme will create tangible stress to the economy or markets,” said Rick Rieder, chief investment officer of global fixed income at BlackRock. “The biggest risk today would be an overheating paradigm where it’s hard to predict how high input, or wage, costs could get.”

Shares in China, where higher interest rates have driven inflows from global investors seeking better returns, shrugged off the Fed announcement. The CSI 300 index of Shanghai- and Shenzhen-listed stocks rose 0.3 per cent after data showed new home prices across the country rose steadily in May. Hong Kong’s Hang Seng index was little changed.

Expectations of tighter policy also weighed on oil prices, with Brent crude, the international benchmark, down 0.4 per cent at $74.12 a barrel. US marker West Texas Intermediate fell by the same degree to $71.86 a barrel.