New Fed cut ‘reinforces’ need for more RBA easing

The US Federal Reserve (the Fed) has cut its funds rate by 25 bps to 1.75-2 per cent, following on from its first cut in almost a decade in August.

According to AMP Capital chief economist Shane Oliver, the Fed is “taking out insurance” amid threats to the US outlook from trade tensions with China, slower global growth and subdued inflation.  

“The current easing cycle remains a bit like the Fed easing of 1987 after the share market crash and in 1998 after the LTCM hedge fund crisis – that saw the Fed cut despite solid growth in order take out insurance in case there was a negative flow on to the economy,” Mr Oliver said.

Mr Oliver said he expects the Fed to cut rates further over the coming months.

“Our assessment remains that another [25 bps] easing is likely, probably in October, or if not, then in December,” he said.

“The risks to the growth outlook – particularly on trade – won’t go away quickly and that the Fed appears to have taken the decision that it’s easier to control a rise in inflation than a further slide or deflation.”

The AMP economist added that he does not expect the Fed and the European Central Bank’s (ECB) cuts to prompt sharper than anticipated easing from the Reserve Bank of Australia (RBA), but noted that they have “reinforced” the need for further easing.  

“On the one hand, the Fed’s easing, along with stimulus elsewhere globally, should help support global growth, which is good for Australia, [but] it’s probably not enough to change the outlook for the RBA and its perception that global risks have increased,” he said.

“Our view remains that [the RBA is] on track to cut the cash rate to 0.5 per cent in the months ahead in two [25 basis point] moves and to some degree the Fed cutting and the ECB easing last week reinforces that to the extent that the RBA would like to keep the Australian dollar down.”

[Related: GDP outlook propelled by rate stimulus]