- The US Federal Reserve (The Fed) cuts rates by a hefty 50 basis points, bringing its key funds rate to a range of 4.75% to 5%.
- The cut, the first in four years, marks the beginning of an aggressive easing cycle with more cuts expected in the next meetings.
- The AUD initially rose due to weakening US dollar right after the announcement, leading to several implications on the economy.
- Economists debate whether the RBA will follow the Fed's easing path.
- Risks to a later start of cash rate cuts emerge following strong jobs print.
The Fed's rate-setting committee voted 11-1 to lower its key benchmark rate by 50 basis points, bringing it to between 4.75% and 5%, affirming market expectations albeit surprising a few who priced in a smaller 25bps reduction.
Outside of the emergency rate cuts that brought the benchmark rate to 0% during Covid, the last time the FOMC cut by half a point was in 2008 during the global financial crisis.
The Fed began jacking up rates at the start of 2022 to curb quickening inflation, which peaked at 9.1% in June 2022 and has since fallen back to 2.5% in July 2024.
Federal Reserve Chairman Jerome Powell, in his post-meeting press conference, described the rate reduction as a "recalibration" of the central bank's policy in an effort to strengthen the US economy and labour market.
"We are not on any preset course. We will continue to make our decisions meeting by meeting," Mr Powell declared.
Echoing the chair's promise to break away from its neutral stance, several FOMC members have indicated that more rate cuts are on the horizon - with projections of another 50bps before the year is out and a further 100bps next year - as the US inflation continues to trend towards the central bank's target of 2%.
Major Australian economists are likewise expecting the US easing cycle is not yet over.
Dr Gareth Aird's economic team at CommBank have fully priced in a total of 225bps cuts, bringing the US key funds rate to within 3%-3.35% range over the next year or so.
Now that the world's most consequential central bank has moved, what does this mean for Australia?
Post-Fed rate cut effects on US - and by extension, AU
This has brought the US in line with the United Kingdom, Canada, New Zealand, and Switzerland, among other developed nations that lowered the benchmark rate.
Following the decision, front-end US treasury yields fell by as much as 10bps, but have since retraced all but 2bps of the move. Similarly, 10-year Treasuries fell by 4bps.
With the US dollar losing its value against most major currencies, the AUD jumped half a cent to a high of US$0.68 right after the announcement.
A stronger Australian dollar brings forth the following economic effects:
- Cheaper imports: The prices of imports will be down, aiding in the RBA's efforts to stem inflation and could eventually lead to cash rate reduction Down Under.
- Decreased export: On the flip side, Australian goods and services become more expensive for buyers using USD, which could lead to a decline in demand for the country's strongest exports like minerals and, in turn, slow down GDP growth.
- Tourism impacts: Tourism will take a hit as foreign currencies will have less purchasing power in Australia. Similarly, international students, a key source of income for Australian universities, may also find it more expensive to pursue studies in the country.
- Lower debt servicing costs: Debt servicing will be cheaper, particularly for AU companies and governments with debt denominated in foreign currencies like the USD.
- Foreign investments may decline: Australian assets, like stocks and real estate, will become more expensive for foreign investors.
However, within hours after the Fed's decision, the AUD had lost its gains and has since fallen back down 70bps from the highs to below pre-Fed level.
A bit of a similar trend was observed in US stocks, where an initial rally turned around after the decision was delivered, with the S&P500 and NASDAQ all ending in the red over fears of economy slowing faster than the Fed anticipated.
The Fed has moved the needle, will the RBA finally lift a finger?
With Chair Powell making good on his promise, Australia's current cash rate of 4.35% is now relatively stronger against the US'.
But this is not new - the RBA has a history of lagging behind other large central banks.
When the US began lifting its rates in March 2022 from emergency lows, the RBA took two months to begin tightening its belt.
The RBA also didn't lift rates as high as the Fed, peaking only at 4.35% whereas the US Fed brought its key funds rate up to 5.50%.
This has been pointed out by several experts, including Judo Bank chief economist Warren Hogan, who believes the RBA has not raised the rates high enough to achieve its target of returning inflation within the 2%-3% band.
And RBA Governor Michelle Bullock is aware of that.
In her speech before the Rotary Club of Armidale in August, she acknowledged that "at the moment, interest rates in the United States are higher than us. We've been criticised for that, in fact."
"We've been criticised by some people saying our interest rates should be near where the United States ones are," Gov Bullock said.
The Fed's decision is unlikely to drive the RBA down the same path.
"But we've chosen, as I said earlier, very deliberately to try and bring inflation down while not turning the economy into a recession and spiking unemployment."
The annual CPI in the June quarter currently sits at 3.8%, with the latest monthly CPI indicator in July at 3.5%.
The RBA Board will meet for the sixth time this year next week.
And with the labour sector delivering another strong result, nothing more is expected from the meeting other than another hold.
As of 18 September, 90% of ASX traders expect the RBA to keep the cash rate unchanged, and the remaining 10% forecast a 25bp cut.
However, risks to a later start emerge on the back of the latest jobs print.
In her Anika Foundation speech two weeks ago, Gov Bullock emphasised that the key to achieving the full employment part of the RBA's mandate is achieving price stability.
"This could be read as drawing a distinction on where the RBA sits on its path towards achieving its mandate (inflation still too high) relative to the Fed (inflation low enough that its focus has shifted to the labour market)," ANZ's economics team said.
"Even if the Fed's decision results in a stronger-than-otherwise AUD over the coming months, the RBA is unlikely to be concerned by this.
"If anything, this could be viewed as helpful, given that goods price disinflation in Australia has lagged other countries."
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