The interest rates in the United States have been on the increasing momentum since December 2015 and since then, the Federal Reserve has remained hawkish on the monetary policy. In a recent meeting of the US central body, Jerome Powell, the chairman of Federal Reserve, stated that the economy is growing at a rapid pace. As a result, the Fed has opted to go for quantitative tightening rather than adapting quantitative easing or QE. The recent move of the US President of tax cuts has also helped the economy to witness growth. This could probably be one reason why Mr. President hates higher interest rates. According to Trump, higher rates would impact the US economy as the Americans would be left be lower purchasing power which could halt the growth prospects.
The market participants are expecting that the US central bank would remain hawkish at least for the next year also thus, the economy needs to prepare itself for further rate increases. In 2016, the global central banks like Bank of Japan, ECB (European Central Bank), Bank of England as well as the Federal Reserve have jointly advanced $US1.7 trillion. However, this year it has witnessed a significant downfall and this downtrend is expected to continue next year as well. This is expected primarily because the Federal Reserve has been cutting its portfolio and the ECB is not making bond purchases.
How Rate Hikes Could Impact Australian Economy?
A strong US dollar is the worst nightmare for the emerging economies and when the same turns into reality, it might derail the growth opportunities for the emerging markets. Higher interest rates might fuel the depreciation of the Australian dollar which could obviously lead to a rise in the inflation. As a result, the Reserve Bank of Australia might also resort to quantitative tightening i.e. might raise the borrowing costs in 2019. On October 4, 2018, the Australian dollar witnessed a downtrend on the back of higher 10-Year US treasury yield. The interest rates in the Australia would not rise at a pace at which the US interest rates are rising and thus, the gap might further lead to a fall in the Australian dollar.
The business houses which are in Australia might witness the impacts of the elevated oil prices as well as depreciation of the Australian dollar.
This whole scenario is a key to watch as global economies might feel the pressure based on movements in this direction.
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