The US Fed Hikes Rates

A year ago the Fed raised interest rates for the first time since the GFC began. However, its initial move combined with worries about just about everything to give us a bout of share market weakness into early 2016 before investors realised that there was indeed no reason to fear the Fed after which things got back on track.

Now as widely expected we have just seen the Fed move again – raising its Federal Funds target interest rate from a range of 0.25-0.5% to the range of 0.5-0.75%, begging the question whether we will go through another bout of market ructions. However, this time around the backdrop is very different to a year ago.

This note looks at the key issues.

Rates on hold

The RBA has opted to leave the official cash rate on hold at 1.5%. This month’s Reserve Bank of Australia cash rate decision has just been announced; the last decision for this year in what has certainly been a jam packed 12 months. I’m pleased to share this update with you and the thoughts on why the Reserve Bank of Australia has made this call.

The RBA elected to adopt a wait and see approach over the Christmas and New Year period and has left the cash rate on hold at 1.5%. Between now and its next meeting in February, the Reserve Bank will weigh up a number of factors including the ‘Trump effect’ which some lenders are attributing to rising funding costs and consequently increasing fixed loan interest rates. Low inflation, slow economic growth, improving commodity prices, a stronger Australian dollar and ongoing concerns around some inner city property markets are among the other factors the RBA will need to take into account.

Rick Maggi