Us Fed

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As the effects of the coronavirus continue to threaten the economy, the US Federal reserve has lowered interest rates to limit further impact. 
The Federal Reserve has lowered its key Fed Funds rate by 0.5 percent, the first unscheduled emergency rate cut since 2008, taking it to a range of 1-1.25 per cent. 
An openness to further easing has been signalled as G7 finance ministers and central bankers commit to use all appropriate policy tools to support growth in the face of the COVID-19 threat. 
The Fed is likely to cut rates by at least another 0.5 percent in the months ahead. And we continue to see the the likelihood of an RBA cut again next month <a href="/expert-insights/finance/rba-cut-interest-rates-at-march-meeting-to-record-low-0-5-per-cent">following the March cut</a>.
RBA Governor Philip Lowe cited the coronavirus nine times <a href="/expert-insights/finance/rate-cut-given-coronavirus-rba-governor-philip-lowes-march-2020-meeting-statement">in his brief meeting announcement</a>.
<img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2020/3/4/Global%20interest%20rates.jpg" alt=""> 
AMP Capital chief economist Shane Oliver says monetary and fiscal policy easing is necessary to help minimise some of the worst economic fall out from the coronavirus outbreak (including liquidity and insolvency problems) and speed the eventual recovery.
"However, we still need to see signs that the coronavirus outbreak is coming under control – with eg a peaking in the daily number of new cases beyond China or say antivirals being successfully deployed.
"At present the daily number of new cases are still trending up in numerous countries outside China so it’s premature to say with much confidence that we have seen the low point in share markets.
NAB now expect the Fed to cut rates by 25 basis points at its March and April meetings.
"We are tentatively pencilling in 25bps at each of these meetings, which would take the fed funds target range to 0.5 to 0.75%," NAB advised.
"For now, we are assuming that the Fed will keep the fed funds rate at this level through our projection period (to 2021) but the risks around this are skewed towards it being more aggressive in the near term (but with a risk of partial reversal of the rate cuts further out assuming growth recovers in the second half of this year)."
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j.ballantyne1990-6AQqhLzZaK

US Fed cuts funds rate by 0.5 per cent to help combat coronavirus economic threat

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<img src="https://counter.theconversation.edu.au/content/79340/count.gif?distributor=republish-lightbox-advanced" alt="The Conversation" width="1" height="1">
GUEST OBSERVER
This week the US Federal Reserve, as expected, raised its benchmark interest rate by 25 basis points, to a range of 1-1.25 percent.
This was the third such hike in the last six months.
Fed Chair Janet Yellen said:
Our decision reflects the progress the economy has made and is expected to make.
Yet not everyone was so jazzed about the decision. In a terrific piece former US Treasury Secretary Larry Summers articulated <a href="https://www.washingtonpost.com/news/wonk/wp/2017/06/14/larry-summers-5-reasons-why-the-fed-may-be-making-a-mistake/?utm_term=.3fd9d567662c">“</a>5 reasons why the Fed may be making a mistake”.
And whether the Fed view or the Summers view is the better one has tremendously important implications for what the Reserve Bank should do here in Australia.
The nub of Summers’s concern revolves around the implicit model of the economy that the Fed is using – and whether it still works in the economic world in which we find ourselves.
The general worry with keeping rates too low, for too long, is that inflation will take off. In the past, policymakers have worried – with good reason – that waiting to raise rates until inflation starts rising much is dangerous because it can get out of control.
If one is not going to wait to see what happens to inflation, then one needs a way to predict the path of it. The traditional approach that policymakers have taken is to look at the relationship between unemployment and inflation – the so-called Phillips Curve – and predict future inflation based on unemployment.
Summers prefers what he calls the “shoot only when you see the whites of the eyes of inflation” paradigm. This – as the imagery suggests – involves waiting until the last possible point before raising rates. In other words, be really sure that the inflation is happening.
This makes sense if the old model is broken, and Summers makes a persuasive case that it is.
First, he points out that the Phillips Curve (the allegedly stable relationship) may not even exist. And even if it did, scholars have pointed out that it would be very hard to estimate statistically the Goldilocks point where unemployment is such that the rate of inflation is stable (the so-called Non-Accelerating Inflation Rate of Unemployment or NAIRU).
Second, Summers offers a different model of the world – at least in part. That model is one where advanced economies – like the US and Australia – are suffering from “secular stagnation”.
According to Summers, the implication for monetary policy of this are as follows:
there is good reason to believe that a given level of rates is much less expansionary than it used to be given the structural forces operating to raise saving propensities and reduce investment propensities.
I am not sure that a 2 percent funds rate is especially expansionary in the current environment.
Moreover, he sees asymmetric risk with getting it wrong, going on to say:
And I am confident that if the Fed errs and tips the economy into recession the consequences will be very serious given that the zero lower bound on interest rates or perhaps a slightly negative rate will not allow the normal countercyclical response.
Maybe the combination of a fire hose of global savings chasing too few productive investment opportunities has changed what level of interest rate can provide a serious boost to economic activity.
Which bring us to Australia. We, too, have relatively low unemployment by historical standards (the ABS just announced a drop in May to 5.5%), yet wage growth is remarkably low. Those two things happening together suggests that our old understanding of the labour market is off the mark. That low wage growth is a major driver of the low inflation we are also experiencing.
If Summers is right, and there isn’t some big point of difference between Australia and the US in this regard, then the unmistakable implication is that the RBA should probably cut rates – perhaps twice – later this year.
But there is that whole housing price thing in Australia. A rate cut could fuel further price rises which, as bad as that is for affordability, is also deeply problematic for financial stability.
Yet, if the Australian economy really does need a rate cut, and governor Philip Lowe holds steady because of housing price fears, then that could trigger a further slowing of GDP growth, put wages under even more pressure, and trigger a recession itself. And that would be bad news for financial stability, too.
Let’s see how the RBA handles that Gordian Knot.
<a href="https://theconversation.com/profiles/richard-holden-118107">Richard Holden</a> is a Professor of Economics and PLuS Alliance Fellow at UNSW and author for <a href="https://theconversation.com/au">The Conversation</a>.
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jchancellor-FAypfDUnLy

Australia is facing an interest rates dilemma

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GUEST OBSERVER
As things go the Dutch election was probably the most important event last night - but I will start with the Fed.
Basically the Fed was more benign than expected. Yes they raised the Fed Funds interest rate by another 0.25 percent to a range of 0.75 percent to 1 percent on the back of ongoing improvements in the labour market and the US economy and progress towards the 2 percent target for core inflation.
The Fed continues to describe the risks to the outlook as roughly balanced and has taken to describing its inflation goal as “symmetric” which highlights that it’s not a hard goal but is to be achieved over the cycle (but no doubt there will be a lot of hot air devoted to what “symmetric” precisely means).
<a href="https://www.propertyobserver.com.au/images/2017/03/16/Screen%20Shot%202017-03-16%20at%2011.15.16%20AM.png" target="_blank">Click to enlarge</a>
<img src="https://www.urban.com.au/images/2017/03/16/Screen%20Shot%202017-03-16%20at%2011.15.16%20AM.png" alt="">
But the key was that the Fed did not signal a faster pace of tightening than had already been indicated. The median dot plot of Fed officials interest rate expectations remained unchanged at three hikes for this year and another three hikes for next year and the Fed continues to expect that future hikes will be “gradual” (albeit less gradual than in 2015 and 2016).
Of course this does not mean that the Fed poses no threat. Market expectations still look remarkably complacent being 1% or so below the Fed’s dot plot for 2019 and at some point in the next year the focus will shift to the Fed allowing its balance sheet to start running down (which will probably be achieved by letting bonds roll off as they mature rather than reinvesting the proceeds). This all points to a resumption of the bond bear market at some point.
But for now markets liked the Fed’s decision with bonds rallying, the US dollar falling and shares rallying as fears that the Fed would get more aggressive did not pan out. Support for this benign response also comes from the likelihood that headline inflation measures will soon peak as the low base for commodity prices a year ago starts to drop out of annual inflation measures and indications that the US economy is still far from booming (March quarter GDP growth looks like coming in below 2% again).
Up until around twenty years ago there was a saying that shares reacted to Fed hikes with “three steps and a stumble”, ie the first two Fed rate hikes had little impact but the third caused a stumble.
In the last two decades this appears to have changed such that that first hike causes weakness (as we saw around June 2004) but subsequent hikes are largely looked through because they are seen as reflecting better economic conditions and hence profits, enabling the bull market to continue until eventually monetary policy becomes tight threatening the economy and bringing an end to the bull market.
So far the US share market seems to be following this pattern, with share market falls around the first rate hike in December 2015 but taking the last two hikes in its stride. Back in the 2004-2006 tightening cycle rates were going up at every Fed meeting and it took 17 hikes to ultimately kill the bull market back then off. With rates starting much lower in this cycle and the process being far more gradual this time around we still have a fair way to go before US monetary policy becomes tight in a way that threatens the bull market in shares. 
<a href="https://www.propertyobserver.com.au/images/2017/03/16/Screen%20Shot%202017-03-16%20at%2011.16.28%20AM.png" target="_blank">Click to enlarge</a>
<img src="https://www.urban.com.au/images/2017/03/16/Screen%20Shot%202017-03-16%20at%2011.16.28%20AM.png" alt="">
Meanwhile, in the Netherlands exit polls point to the current PM Mark Rutte’s Liberal Party winning 31 seats in the 150 seat parliament against Geert Wilders’ Eurosceptic Freedom party only getting 19. While the Liberal Party is down on 41 seats from the 2012 election it will lead negotiations to form a centrist coalition government (which usually takes months) and Rutte will most likely remain PM.
If confirmed this would be a far worse outcome for the Freedom Party than had been expected, particularly given that turnout was high at over 80 percent. It would mark the third election in the Eurozone in a row since the Brexit vote that has seen support for anti-Euro populists gain less support than expected: support for Podemos declined in the Spanish election straight after Brexit, the Austrian’s voted for the pro-Euro candidate in their December election and now the Netherlands look to have stuck with pro-Euro centrists as well. 
Maybe the Europeans have seen Brexit and Trump and decided that’s not for them! Popular support for the Euro remains high and this is clearly working against populist/nationalist parties and is likely to do so in the elections in France starting next month too. Italy is probably the biggest risk but the key message is that the risk of a break up in the Eurozone is overstated and this leaves Eurozone shares and peripheral bonds looking attractive. It’s also supportive of the Euro.
<a href="https://www.propertyobserver.com.au/https://plus.google.com/110172465327488162875?rel=author">SHANE OLIVER</a> is head of investment strategy and economics and chief economist at <a href="https://www.ampcapital.com.au/home">AMP Capital</a> and is responsible for AMP Capital's diversified investment funds.
 
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