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What a US Fed rate rise means for Australia

What a US Fed Rate Rise means for Australia

An improving job market in the United States and a strengthening national economy is likely to see the US Federal Reserve (Fed) lift rates for the first time in a decade this week.

The Fed itself has been abundantly clear it is keen to begin the “normalisation” of US monetary policy, but mixed US economic data in recent weeks has thrown a question mark into the mix.

Dr Shane Oliver, Head of Investment Strategy and Chief Economist at AMP Capital still believes a rate hike on 16 December is 70 per cent likely.

“The Fed is on track for a mid-December rate hike, but it’s likely to be a “dovish hike”,” he said.

“While some at the Fed are feeling nervous about the Fed’s December meeting, the clear messages from Chair Janet Yellen are that: the recent flow of information has been satisfying the conditions for a December hike; the hike when it comes will be a sign of how the US has recovered since the GFC; and that subsequent rate hikes will likely be gradual and tied to progress in lifting inflation back towards the Fed’s target,” he said.

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How will the global share market be effected?

A US rate rise has the potential stir up the global share market but as the announcement gets nearer, the immediate effects are becoming harder to forecast.

Speculation about the rise has been circulating for months now, and as a result, the Fed has been busy placating nervous onlookers that any rise will be incredibly slow and measured.   So much so that now some observers believe that the market has already adjusted to the rise before it has actually happened.

Peter Arnold, analyst at RateCity.com.au believes that market nerves has largely been pacified in advance.

“At this stage there is no clear indication that a Fed rate rise will create an immediate storm on the global share market,” says Arnold.

“On the contrary, the speculation of a rise has already caused ripples in what is already a volatile share market and an announcement from the Fed may actually be beneficial in settling uncertainties,” he said.

“The bank has indicated that any rise in rates will be done gradually and a September rise was already put off due to the precarious state of the global market at the time,” he said.

How does a US rate rise impact Australia?

The good news for Australians is that a rate rise in the US is not likely to signal a rate rise by our own reserve. Dr Oliver instead sites the Reserve Bank’s bias towards cutting interest rates further as a guarantee against increases in the near future.

Our neighbours might not be so lucky however as emerging economies will likely take the biggest blow if the expected rise takes place. The chief economist of the World Bank Kaushik Basu told the Financial Times the rise could begin “panic and turmoil” in countries such as China that have recently experienced volatile market conditions.

“The world economy is looking so troubled that if the US goes in for a very quick move in the middle of this I feel it is going to affect countries quite badly,” he told the paper in September, suggesting that this would lead to a global phase of slow growth.  

Despite this there is only one direction the emergency low rates the Fed has employed since the Global Financial Crisis can go and with the U.S economy in prime position it is only a matter of time until the highly anticipated rise takes place.

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