On the 30 October 2019 2.00 pm (EDT, US), the FED announced a cut in the federal funds rate (equivalent to the RBA’s cash rate) by 25 basis points from a range 1.75 – 2.00% to 1.50 – 1.75%
There are a few key points on why this decision was reached, including:
Continued trade war tensions between the US and China is creating further uncertainty for US companies. This ongoing uncertainty is making some companies more cautious about their capital spending. Additionally, business fixed investment and export has remained week.
Core inflation (excluding energy and food prices) has been steady at around 1.8 per cent over the last 12 months. This is below the FED’s target of 2.0 per cent inflation.
Wages are steadily rising, but not at the rate that can put upward pressure on inflation to reach the 2 per cent target.
Global growth has weakened, most notably growth in Europe and China.
Will there be future rate cuts?
The US Federal Reserve notes that “Looking ahead we will be monitoring the effects of our policy actions along with other information bearing on the outlook as we assess the appropriate path of the target range for the federal funds rate. Of course, if development emerges, that caused a material assessment of our outlook, and we will respond according, the policy is not on a pre-set course.”
The Chairman of the FED Jerome Powell stated that “we would need to see a really significant move up in inflation that is persistent before we even consider raising rates to address inflation concerns”.
This is the critical point if inflation remains under the 2% range, further rate cuts to the federal funds rate could be expected in the future.
Jerome Powell also notes, “Trade uncertainty is weighing on business sentiment in our judgement and in the judgment of many analysts, and ultimately could affect activity.”
What is the market response?
In response to this announcement, the Dow Jones at 2.00 pm was at 27,058 points and then increased to 27,186 points by the close, or a rise of 0.43%. Further, the $US/$A exchange rate strengthened to 0.6914 cents on the back of a weakening US$.
The Australian market is slightly down today (4.00 pm, 31 October 2019) by a modest 0.4%. The question arises whether the Reserve Bank Board may now take a more cautious approach to cash rate reductions going forward. Alternatively, follow the US lead and continue with an expansionary monetary policy setting.
Investors could expect further rate cuts moving into the near future. This assessment is based on the global economic outlook. The global economic outlook is negative with further economic uncertainty, low inflationary environment, continued trade tensions with the US and China, along with political uncertainty surrounding Brexit and a slowing of global economic growth.
This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978)
(“ASR”). ASR is part of Amalgamated Australian Investment Group Limited (AAIG) (ABN: 81 140 208 288 Level 13, 130 Pitt Street, Sydney NSW 2000).
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