Daily Commentary BY THE CURVE TEAM –

Fed Funds Rate Lower for Longer

17th of September, 2020

Like the RBA, the Federal Reserve is forecasting record low rates for some time.

In the first Federal Reserve meeting since they announced a shift to average inflation targeting, the Fed released their expectations for rates and the economy. They made it clear that they would not increase the funds rate target of 0-0.25% until full employment had been reached and inflation averaged 2%.

With the new outcome-based approach, six of the ten board members forecast rates to be unchanged until the end of 2023. Inflation is only expected to return to 2% in 2023 and unemployment to return to pre-Covid levels in 2023.

The forecasts are similar to the RBA’s. Even in an upside scenario for the economy, the RBA sees inflation remaining below 2% and unemployment at 7% by the end of 2022.

Similar to the Fed, the RBA have made it clear that they would not consider raising the cash rate until progress towards full employment and their inflation target has been made. Based on their forecasts, they don’t expect this to occur until 2023 or beyond.

In yesterday’s commentary, we noted that the central bank policies of other countries would factor into the RBA’s decision making. This was apparent in the RBA’s cognisance of the value of the Australian Dollar, which is influenced by the interest rates of other countries. Given the bulk of international transactions are in US dollars, the policy of the Fed will be most relevant of the world’s central banks.

Should Australia’s economy perform better than the US it will be harder for Australia to raise rates without the Australian Dollar appreciating too much. Should the US’s economy perform better than Australia’s, it will be easier for the RBA to raise rates as the Australian Dollar would be expected to depreciate (ceteris paribus) which would boost the economy.

One of the key barometers for the RBA, employment, will see an update today. Data for August will be released with 35 000 jobs expected to have been lost and unemployment to rise to 7.7% from 7.5%.

The period reflects Melbourne’s move to a stage 4 lockdown. It will also be the penultimate update for employment before JobKeeper eligibility is amended, which should see the official unemployment rate rise.

Josh Stewart

Client Relationship Manager