The Fed yesterday opted to raise its Federal Funds target interest rate from a range of 0-0.25% to 0.25-0.5%.
While it is the first movement in the better part of decade, AMP Capital chief economist Shane Oliver said the decision was not one that came out of the blue.
“The move is hardly a surprise. The Fed has been talking about a rate hike ever since ending quantitative easing over a year ago,” Dr Oliver said.
“After being delayed in June and September, due to a combination of soft US data and financial market turmoil, the Fed has given ample warning recently of a December hike provided there were no unanticipated shocks,” he said.
Dr Oliver said the increase should be seen as positive, indicating the US economy is on its way to recovering to pre-GFC levels.
“The reasons for the hike are simple. The extraordinary monetary easing since the GFC (zero interest rates and three rounds of quantitative easing) have done their job in seeing off the risk of a depression and returning US growth to reasonable levels. Jobs are now well up on pre-GFC levels, unemployment is down to 5%, confidence is up, the housing sector has recovered and business is investing,” he said.
“At its core the Fed's move is positive as it signals that the US economy is strong enough to be further taken off the life support that has been in place since the global financial crisis.”
According to Dr Oliver, the fact that the US economy is showing positive signs is why the Reserve Bank of Australia won’t be following in the Fed’s footsteps.
“Australian rates often follow the big swings in US rates, but in recent times they have diverged. With the Australian economy on a weaker trajectory relative to its potential than the US economy, the RBA will not be following the Fed into a rate hike.
“In fact, the odds remain that the RBA will have to cut again as the mining boom continues to unwind, the contribution to growth from housing starts to peak next year and inflation remains low.”
The Fed’s increase does mean that the Australian dollar is likely to keep falling against the greenback.
“With the Fed undertaking a dovish rate hike there is a risk that a further fall in the $A will be further delayed.
“But as the Fed undertakes more, albeit gradual, rate hikes next year, the RBA retains an easing bias and commodity prices remain weak the trend in the $A is likely to remain down with it heading to around $US0.60 sometime in the next 12 months.”
