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The Yanks raised interest rates overnight! Does it hurt or help us?

Peter Switzer
15 June 2017

By Peter Switzer

The US central bank, better known as the Fed, raised interest rates for the second time this year and its boss, Janet Yellen, made it clear she expects to go one more time this year. But what does this mean to us here in Australia?

This kind of thing is always a bit of guesswork and you can live to regret trying to work out the strange thinking of the big influencers of financial markets. But let’s have a crack at it.

On net, this should be a plus for us and here’s why:

  • The Oz dollar dropped about half a cent after the decision and a lower dollar is a plus for our economic growth.
  • The Fed is still positive about the outlook for the US economy, with 12 out of 16 Fed members expecting another rate rise this year.
  • As a group, the Fed is not buying the US economy is in trouble, though they are watching the inflation rate.
  • Their relatively positive view on the US economy adds to the better outlook for the Eurozone and comes as Chinese economic data out yesterday came in better than expected.
  • Putting this all together, it makes a good case against a recession scenario that could lead to a stock market crash. 

There are market experts starting to talk about a correction — a substantial market sell off. And as US market indexes did not react with convulsions, it suggests that the optimists continue to outnumber the pessimists, despite the higher official interest rate, up 0.25% to a range between 1% and 1.25%.

Recall this got as low as 0% to 2.5% at the worst for the Yanks and this is another step towards normalising monetary policy and a more normal economy.

The Fed’s action also says, even without Donald Trump’s troika of policies (lower taxes, infrastructure spending and less regulation), the US economy is getting better, not worse.

If we throw in the possibility that Trump surprises and pulls off his tax measures before year’s end (which is something I think our stock market will need to crack the 6000 level), then 2017 could end up finishing on a high.

Yesterday, the Westpac measure of consumer confidence came in as a disappointment and not as positive as the ANZ/Roy Morgan weekly measure.

The Westpac/Melbourne Institute survey of consumer sentiment fell by 1.8% in June to a 14-month low of 96.2. A reading below 100 denotes pessimism outweighs optimism when it comes to consumers and the last thing we need is a serious stock market rout.

But for those looking for a good omen, the NAB’s business conditions and confidence numbers make better reading, with the latter near seven-year highs!

We need a lot to go right to make consumers more positive because wage rises don’t look set to spike any time soon. But if Canberra can start showing some positive leadership signs, Donald pulls off a big tax play and business investment follows the very good business confidence readings, then we just might end on a high come Christmas and New Year.

If the Fed had shown it was too scared to raise interest rates, Wall Street could have really sold off, generating the kind of negativity we really don’t need right now.

Well done, Janet. I hope you are on the money when it comes to your assessment of the world’s most important economy.

Peter Switzer's book Join the Rich Club is on sale for 30% off from the Switzer Store until the end of Easter. Click here to pick up a copy today!

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