Australia reacts as US Federal Reserve slashes interest rates

Australia’s interest rate path and the outlook for its economy has entered a new zone of uncertainty after the US Federal Reserve slashed interest rates in the world’s largest economy on Thursday morning.

The Fed cut rates by a “jumbo” 50 basis points to 4.75-5 per cent in a move to support America’s cooling labour market, but the cut has produced a mixed reaction on markets as growth fears percolate for the US economy.

Capital.com senior financial market analyst Kyle Rodda warned that Australia would be hit by any slowdown in the US.

“It could possibly indicate the Fed sees risks to US growth, which if that materialises, and the US economy does slow down and weakens the global economy, the Australian economy will suffer,” he said.

“This maybe indicates the Reserve Bank of Australia will be able to follow suit with interest rate cuts.

“But at the moment, the data isn’t supportive of that.

“Our inflation rate is a bit higher and we get some jobs data today.”

US markets surged but then fell in choppy trading after the announcement, with the Dow Jones closing down 103 points, or 0.25 per cent, to 41,503.

The ASX 200 has lifted at the opening bell, jumping 25 points in the first few minutes of trading.

“It could be the case the markets are now unwinding expectations of the same level of easing and that is hurting asset valuations and boosting the US dollar,” Mr Rodda said.

“That would not necessarily be anything to do with the real economy in the immediate term, it’s more a valuation thing.

“It could be a negative signalling about the US economy, it could also be the Fed wasn’t aggressive enough because the market set the bar too high for the Fed to exceed.”

The RBA Board meets next week, with Australia’s cash rate sitting at 4.35 per cent after rising sharply from 0.1 per cent in May 2022.

Mr Rodda said the Fed cut would not inform next week’s meeting and cautioned that the US and Australia were “fighting different battles” and there were “unique” factors keeping inflation sticky in Australia.

“It could be the fact this drags the RBA closer to cutting interest rates,” he said.

“One, because it signals that growth slowdown, which will eventually hit Australia and the RBA would then have to respond to the weaker economy, so it would be an indirect effect.

“But where things become complicated in Australia, if you listen to the RBA’s commentary in the last couple of weeks in particular, is that their concern is not about where demand is at the moment.

“They are concerned about the supply side of the economy, which is kind of independent, or isn’t as related to growth in the economy, and more about productivity, and the economy’s capacity to keep up with even the weak demand that we’re seeing right now.

“And that is why inflation is high. They are seeing inflation pressures that are coming from poor supply-side factors.”

Treasurer Jim Chalmers, speaking with Today on Thursday morning, said the global economy was now a “pretty uncertain place”.

“It is true in the US that their jobs market’s been softening and there are issues, there are concerns around a slowdown in the US.

“We’ve also got a slowdown in China and I’ll be there at the end of next week.

“The global economy is a pretty uncertain place, that’s one of the reasons why we’re seeing these rate cuts in places like the US.”

Commonwealth Bank expects the RBA to begin cutting rates later this year, but Mr Rodda said markets predicted cuts to arrive in 2025.