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US Fed’s decision to hold rates ‘both good and bad’

A senior economist has commented that the US Federal Reserve’s decision to hold interest rates could be both good and bad for the Australia economy, as it has potentially negative implications for the AUD, but could provide extra demand for Australian exports.

At its September meeting, the US Federal Reserve chose to keep its funds rate on hold at 0.25 to 0.5 per cent.

Responding to this, AMP Capital chief economist Shane Oliver told Mortgage Business that “you can look at the Fed’s decision in two ways” in terms of its impact on Australia.

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“On the one hand, failure to raise interest rates means upward pressure on the value of the AUD, which makes life tougher for Australian companies that have to compete internationally,” he said.

“On the other hand, if the Fed were just blindly raising rates, that would be bad for US growth which would be bad for global growth, which would be bad for Australia.

“It’s bad in terms of the impact on the currency, but good in terms of the impact on global growth and demand for our exports,” he concluded.

Mr Oliver highlighted that the decision by the Fed to delay raising interest rates pushed the value of the Australian dollar above $US0.76, “because it makes it more attractive than perhaps previously expected for investors to park their money in Australia”.

Although one of the drivers of the Australian dollar is the “relative attractiveness” of parking money in Australia, Mr Oliver said that “the most common thing that people think is driving the movement of the dollar is commodity prices”.

“Commodity prices go up, the Aussie dollar goes up, commodity prices come down, the Aussie dollar comes down,” he explained.

What next?

PIMCO global strategic advisor Richard Clarida noted that the Fed’s summary of economic projections shows it still anticipates a rate hike later this year, though both Mr Clarida and AMP Capital’s Mr Oliver have suggested that this will be dependent on economic data over the coming months.

“With the obligatory ‘data dependency’ caveat, this is a committee that expects to hike later this year, which would mean at the December meeting,” Mr Clarida explained.

Mr Oliver added that the US money market has put the probability of a December hike at 61 per cent, which he said “sounds about right”.

[Related: Fed likely to raise funds rate in September]

US Fed’s decision to hold rates ‘both good and bad’
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