On the 18 September 2019 2.00pm (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 2.25 – 2.00 per cent to 1.75 – 2.00 per cent.

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 weakened.
  • Core inflation (excluding energy and food prices) has been steady around 1.6 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 upwards 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 “In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective”.

The Chairman of the FED Jerome Powell stated that, “the projects of appropriate policy participants generally anticipate only modest changes in the federal funds rate in the next couple of years”.

Jerome Powell also notes “There are risks to this positive outlook due particularly to weak global growth and trade developments and if the economy does turn down, then a more extensive sequence of rate cuts could be appropriate, we don’t see that, it is not what we expect, but we would certainly follow that path if it is appropriate”.

What is the market response?

In response to this announcement, the Dow Jones at 2.00pm was at 27,052 points and then dropped to 26,942 points. US markets then rallied to finish the day at 27,147, or a rise of 0.13 per cent. Further, the $US/$A exchange rate weakened to 0.6815 cents on the back of a strengthening $US.

The Australian market is slightly up today (11.00am, 19 September 2019) by a modest 0.6 per cent. The question arises whether the Reserve Bank Board may now take a more cautious approach to cash rate reductions going forward.

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 with continued trade tensions with the US and China, along with political uncertainty surrounding Brexit and a slowing of global economic growth.

 

Disclaimer:

This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978)

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September 19, 2019