Daily Commentary BY THE CURVE TEAM –

FOMC Steady as RBA Sounds Warning

24th of May, 2018

The minutes from the most recent Fed meeting confirmed the path forward remains unchanged, leaving the debate open around exactly how many hikes are still to come this year. Overnight the RBA Governor sounded the warning alarm over Chinese debt and the risks it poses.

Judging by the markets reaction to the Fed’s minutes, they must of been expecting a little more of a hawkish tilt. The message from the Fed remained consistent with what we have seen in recent times.

At the core the minutes highlighted that the Fed won’t be rushing into a more aggressive path should their preferred inflation measure jump above 2%. Rather they will continue with the gradual approach to policy normalisation.

That has left the debate open as to whether we will see a further 2 or 3 hikes this year. It is likely that the fourth will be highly data dependent as the year rolls on.

Meanwhile RBA Governor Lowe speaking overnight had a bit to say on the growing debt issue in China and the impact it could have on Australia. As the connections between the two country’s continues to grow, how the situations evolves will be of increasing importance to Australia and our economic fortunes.

Lowe said that, “It is too early to tell whether the authorities will be successful in managing the transition from a growth model heavily dependent upon the accumulation of debt to one where credit is less central. It is a very significant task.”.

He went on to say, “China’s challenge is made more complicated by the dual nature of the task to bring down debt levels while also reconfiguring the financial system so as to better meet the needs of the people,” adding that “So there is still a lot to be done. At the RBA we are watching this process carefully.”

David Flanagan

Director - Interest Rate Markets