US Fed ends quantitative easing

AMP Capital chief economist Shane Oliver says the ending of US quantitative easing (QE) is a positive for Australia for two reasons.

“First, it’s another sign the US economy is on its feet again and a stronger US is good news for Australia as it means a stronger global economy,” Mr Oliver said.

“Second, it removes a source of upwards pressure on the Australian dollar, allowing it to continue its downtrend, once current oversold conditions are relieved, which will likely see it fall to around $US0.80 over the next year or so,” he said.

“This will help the Australian economy rebalance as the mining boom fades.”

QE was needed to boost the supply of money in the US economy given the difficulties in pushing interest rates negative, and helped the economy by lowering borrowing costs.

Mr Oliver said that while there is much debate over whether QE has worked, the evidence clearly suggests that it has.

“While the US economy is still far from booming: growth has picked up pace; bank lending is strengthening; housing construction is recovering; consumer spending growth is reasonable; business investment is strengthening; business conditions are strong; employment is above its early 2008 high and unemployment has fallen to 5.9 per cent and deflation has been avoided,” he said.

While the Fed has now ended its US$1.66 billion QE program, it has decided to keep rates at current levels as the country’s economy continues to improve.

If things go according to plan, Mr Oliver believes the next step could see the Fed start to tighten its monetary policy.

“This will come in the form of raising interest rates and starting to reverse its QE program,” he said.

“However, the Fed has made it clear that tightening is contingent on the economy continuing to improve and signs inflation is moving up to target.

“It has also continued to point out that it anticipates a “considerable time” to elapse before it starts to tighten.”