US Federal Reserve moves on rates


The US Federal Reserve appears to be adopting a neutral stance on the state of the world’s largest economy

The central bank of the world’s biggest economy drops its cash rate 25 basis points

31 October 2019 | Marcus Reubenstein (Image: Vladimir Solomyani/Unsplash)

In a widely expected move, the US Federal Reserve has cut official interest rates by 0.25%, also moving its stance on monetary policy. Says Michael McCarthy, Chief Strategist of CMC Markets, “The wording of the accompanying statement shifted the Fed’s stance towards neutral from dovish. Stocks rallied despite the less accommodative language. A surprisingly strong read on US GDP and ongoing positive corporate reporting may explain the enthusiasm for risk assets.”

In a note to investors, AMP Capital Chief Economist, Shane Oliver says, “While US growth is still good, as with the July and September rate cuts the Fed’s latest move is basically insurance against the threats to the US outlook from the trade war and slower global growth at the same time that inflation is still running just below target.

“The current easing cycle remains a bit like the Fed easings of 1987 after the share market crash, 1995-96 and in 1998 after the LTCM (Long-Term Capital Management) hedge fund crisis – that saw the Fed cut interest rates by 0.75% despite solid growth in order take out insurance in case there was a deeper downturn.

“The Fed has now moved to a more neutral bias on rates dropping its pledge to “act as appropriate” with a commitment to monitor data to assess the “appropriate path” for rates with Fed Chair Powell describing the current stance of policy as appropriate as long as data is consistent with the outlook and noting that the risks have declined a bit. In other words the Fed is still prepared to ease again if needed but is thinking it won’t need to. Meanwhile Powell also committed not to raise rates unless there is a really persistent move up in inflation. 

“Market expectations are for one more Fed easing next year, but I think it’s now 50/50,” says Oliver.

Many analysts believe the Fed is at or close to the bottom on rates; and that President Trump has incentive to resolve the China trade dispute and ensure the US economy is strong ahead of next year’s presidential election.

Source: AMP Capital/Bloomberg

Interest rate implications for $A

A cut in US interest rates, combined with stimulus elsewhere globally is good for global growth, which should be good for Australia. There is a risk though if interest rate movements sees a shift in the value of the Australian dollar. Says, Shane Oliver, “A concern for the Reserve Bank of Australia is that with the Fed easing the interest rate gap between Australia and the US looks like it might be bottoming. If it starts turning up, particularly if the Fed eases further and the RBA doesn’t, then it could put upwards pressure on the value of the Australian dollar. That could offset part of the RBA’s monetary easing this year.

“In fact the Australian dollar is already up more than three percent from its recent low and is breaking above $US0.69. So this is another reason to expect further RBA monetary easing, despite recent signs that the RBA is not in a rush to ease despite another low inflation reading for the September quarter.

“Falling and low interest rates are generally positive for shares, unless there is a global recession. While the risk of recession has been rising on the back of the trade war we remain of the view that it will be avoided, particularly now with the trade war now likely going on the backburner for a while.”