Fed Keeps The Rate Unchanged; Interest Rate Scenario In Australia

Following the release of FOMC implementation note, the benchmark indices in the USA closed on the greener side, wherein S&P 500 index closed at 2926.46, slightly up by 0.3% or 8.71 points while Dow Jones Industrial Average (DJIA) closed at 26,504, up by 0.15% or 38.46 points (as on 20 June 2019).

As per the release, the Fed seeks to maintain price stability and foster maximum employment; thus, the interest rates remain unchanged, which was between 2.25 per cent to 2.5 per cent. Also, the committee’s perception of the economy continues to remain as ‘sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective’. However, the press release also read that the outlook appeared uncertain.

Importantly, this time the committee has used the word uncertainty, probably signalling trade wars with China or the recent twitter spat of President Donald Trump and ECB’s President Mario Draghi over the interest rates.

A few days before the scheduled FOMC meeting, reputed currency wars started to show signs with European Central Bank’s (ECB) President, Mario Draghi voicing out dovish comments, as ECB may ease its policy even more, in order to conduct more asset purchases if inflation does not meet its target. This remark from ECB’s President sent some of the global bond yields to historic lows, with German 10-year yield touching an all-time low of negative 0.32 percent while the French 10-year yield was in the negative territory for the first time. Subsequently, the euro dropped 0.2% within minutes after ECB’s President had delivered his remarks.

It should be noted that the G20 meeting is scheduled next week, and any provision coming from the meeting with respect to trade wars or reputed currency wars may hit the markets, along with the perception of the US Fed.

President Trump’s administration is busy keep a stronger dollar while optimistic investors and market participants are not ruling out the possibility of a similar agreement like the historic 1985 Plaza Accord; wherein the USA was forced to devalue its currency due to the fact that the current account deficit approached close to 3% of the GDP.

Australian Affair

In Australia, the benchmark index S&P/ASX 200 closed at 6687.40, up by 0.59% or +39.30 points as on 20 June 2019. The markets in Australia did not react drastically to the Federal Reserve’s unchanged rate scenario while the AUD/USD was at 0.6921, up by 0.57 percent (as at 7:44 PM AEST on 20 June 2019).

On 4 June 2019, Reserve Bank of Australia (RBA) lowered the cash rate by 25 basis points on the back of weak employment growth, while keeping the inflation target in line with the medium-term target.

Mr Philip Lowe, Governor of RBA, mentioned in the Monetary Policy Decision release that the global economy is reasonable and the uncertainty in international trade is affecting the investment sentiments for many countries. He further said that the inflation of the developed nation remains subdued, and wages growth has picked up with low unemployment rates.

Growth

As per RBA’s official release, the Australian economy would grow by 2.75 percent in 2019 and 2020 backed by the investments into infrastructure, with resources sector having picked up as well. However, the uncertainty persists within the household consumption, which has been affected by the extended period of slower pick in income levels coupled with declining property prices. The economy is expected to experience some relief in the household disposable income growth, which will support consumption.

Unemployment

Reportedly, the past year had witnessed a strong employment growth; labor force participation has been increasing while the vacancy rate remains high, and some areas reported skill shortages. For months, the unemployment has been steady around 5 percent, which ticked to 5.2 percent in April. The private sector has noticed some wages growth due to the employment growth over the past year; however, the overall wage growth remains low. RBA perceives that these labor market conditions signal that the Australian economy could sustain a lower rate of unemployment.

Inflation

According to the RBA’S release, the recent inflation outcome was lower than market expectation and suggested submissive inflationary pressures across most parts of the economy. RBA also anticipates that due to increase in petrol prices in 2019 June quarter, inflation would pick up. Further, the target for the inflation as per RBA is 1.75 percent this year with 25 bps rise for the next year to 2% in 2020, and maybe a little higher after that.

Housing

Reportedly, adjustments in housing markets continues, following the large run-up in prices in some cities. Although, auction clearance rates have increased and price decline has slowed down in some cities, the conditions still remain soft overall.

RBA sees that the housing demand has been stabilised; however, the credit conditions remains tighter, while the demand for credit by investors has decreased for some time. Further, the bank mentioned that the mortgage rates were low and strong demand existed for the borrowers of high credit quality.

Rationale of Rate Cut:

As per the release, RBA believes that the rate cut would make further revive the spare capacity in the economy to produce, demand or supply. RBA perceives that the rate cut would help in keeping a check at the jobless figures with a continued progress towards the inflation target. Board of RBA would continue to oversee the developments in the labor market and adjust the monetary policy to promote stable economic growth while achieving the inflation target over time.

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