The US Federal Reserve (Fed) has cut its key fed funds cash rate by 0.25 per cent to a range of 2-2.25 per cent, which is the first rate cut since December 2008.
AMP Capital chief economist Shane Oliver said with underlying US growth still solid and the jobs market tight this should be seen as the Fed taking out some insurance given various threats to the growth outlook including from the US and China trade war, tensions with Iran and slower global growth generally and a greater willingness by the Fed to take risks with higher inflation as opposed to deflation.
Mr Oliver said the easing cycle by the Fed is likely to be limited to around two or three rate cuts with the next likely coming in September as opposed to the four or so that the money market has factored in.
The fall in interest rates may be positive for shares, he said, as interest rate cuts tend to help boost economic and profit growth and make shares relatively more attractive than cash and hence are usually associated with a higher price to earnings multiples.
The recent cut by the Fed is unlikely to have many implications on Australian interest rates, however, he said.
“The directional relationship between the US and Australian interest rates weakened long ago. The RBA started raising rates in 2009 when the Fed held at zero, it was easing in 2016 when the Fed was hiking and this year it started cutting ahead of the Fed,” said Mr Oliver.
“So just because the Fed moves doesn’t mean the RBA will as well.”
The Fed’s easing along with stimulus elsewhere globally will support global growth, however, which will benefit Australia, he explained.
“It’s probably not enough to change the outlook for the RBA [though]. Our view remains that it’s on track to cut the cash rate to 0.5 per cent by early next year and to some degree the Fed cutting too reinforces that to the extent that the RBA would like to keep the Australian dollar down,” he said.
