US Fed keeps rates steady

AMP Capital chief economist Shane Oliver said that while the decision by the US Fed to keep interest rates at between 0.25 per cent and 0.5 per cent was widely anticipated, it was more dovish than expected.

“While it sees continued moderate growth in the US, it also acknowledged ongoing global and financial market risks and lowered its so-called ‘dot plot’ of meeting participants’ interest rate expectations to show just two 25 basis point rate hikes this year – down from four – and lowered the long-term interest rate expectation to just 3.25 per cent from 3.5 per cent,” Mr Oliver said.

“Fed chair Janet Yellen in her press conference also signalled a greater willingness to tolerate upside surprise on inflation as opposed to it continuing to run below 2 per cent, as the Fed has more policy room to deal with an upside surprise in inflation than a downside surprise.”

Mr Oliver said the Federal Reserve's continuing dovishness maintains recent upwards pressure on the value of the Australian dollar, which rose 1.5 per cent in reaction to the Fed’s announcement.

“This could go further in the short term, but with the Fed still heading towards rate hikes (albeit ever more gradual) and the RBA still biased towards cutting rates, we still see the [Australian dollar] ultimately resuming its downtrend,” he said.

Mr Oliver said the Federal Reserve does not appear to be leaning towards a rate increase in April, but a hike in June “does look like a reasonable base case, particularly given the recent upwards momentum in US inflation, but with only around 55 per cent probability”.

“And it’s dependent on global threats and financial market turbulence continuing to settle down,” he added.

[Related: NAB changes tone on Fed rate hike]