Daily Commentary BY THE CURVE TEAM –

US Federal Reserve Has Its Own RBA Moment

15th of July, 2019

The US Federal Reserve is having its own RBA moment which will have ramifications for monetary policy globally.

Despite having a strong economy and record low unemployment, the Federal Reserve is set to act to extend the current record expansion. Fed Chairman Powell said as much is his two day testimony to Congress last week. In a similar move to our own central bank, Powell said that:

“We’re learning that interest rates — that the neutral interest rate — is lower than we had thought and I think we’re learning that the natural rate of unemployment is lower than we thought. So monetary policy hasn’t been as accommodative as we had thought.”

This means it is likely we will see the Fed join the movement towards easing monetary policy, potentially as soon as the end of this month. This will have ramifications for markets and the settings of monetary policy globally.

The effect of the shift in Fed’s stance on monetary policy will have implications for our own setting of monetary policy. Currency markets are where it is already being felt with the AUD back trading above the level prevalent before the RBA made the first of two rate cuts.

We will hear more from the RBA this week when the minutes from their July Board meeting are due. While the minutes could contain clues to the outlook, it is more likely that Governor Lowe will use his speech at the Anika Foundation next Thursday to drop major hints on the outlook which will then be fleshed out in the August Quarterly Statement on Monetary Policy.

Also of importance this week will be the latest employment data from the ABS given the focus on spare capacity in the labour force. The market is currently only expecting jobs growth of 9,000 jobs for June with the unemployment and participations rates to remain steady at 5.2% and 66% respectively.

David Flanagan

Director - Interest Rate Markets