Turmoil as US interest rates hiked
Sharemarket investors will need to brace for more turmoil as the US Federal Reserve pushes ahead with more interest rate rises in the coming year.
Yesterday the Fed raised the US rate to 2.25 per cent — the eighth hike since 2015. It also indicated another hike is likely in December and delivered forecasts which point to as many as three more hikes in 2019.
Stocks fell on Wall Street erasing earlier gains, although analysts described the reaction as moderate.
Across Asia markets were mixed. The NZX-50 closed down 0.87 per cent and (at 5pm) Australia’s ASX200 was down 0.10 per cent, Japan’s Topix was down 0.66 per cent.
Rising US interest rates are putting pressure on highly indebted emerging market economies as their currencies depreciate relative to the greenback.
In New Zealand the official cash rate is firmly on hold at 1.75 per cent. A statement from the Reserve Bank yesterday indicated that was unlikely to change until at least 2020. As the differential between New Zealand and US rates grows it is likely to put downward pressure on the kiwi.
However with Australasian banks having decreased reliance on overseas funding since the global financial crisis (GFC) there is less pressure on local mortgage rates.
Higher interest rates also make investments like bank deposits more appealing relative to the equity market returns so are seen as a threat to the nine-year bull run.
Meanwhile, Federal Reserve chairman Jerome Powell has shrugged off comments by US President Donald Trump, who appeared to be applying political pressure to keep rates low.
“We are doing great as a country,” Trump said at a press conference in New York. “Unfortunately they just raised interest rates a little bit because we are doing so well. I am not happy about that. Basically, I’m a low-interest-rate person,” Trump said.
Powell said US central bankers were “focused exclusively” on their mandate to pursue full employment and stable prices. “We don’t consider political factors,” he said when asked about pressure from Trump to keep rates low. In what can only be a good sign for the rest the US and the rest of the world, Powell seems well aware of the risks of the US economy overheating. After a decade-long expansion that’s been marked by mostly modest growth, Powell said “this is a pretty good moment for the US economy”.
Growth and job gains have been “strong” and inflation remains near the central bank’s 2 per cent target.
However, historically, periods of strong US economic growth and the subsequent tightening of the money supply have tended to end in a crash or recession. Powell’s task is to try to manage a soft landing for the economy which has raced away since Trump introduced significant tax cuts while also increasing Federal Government spending in areas like defence and homeland security.
Powell needs to raise rates just enough to keep a lid on inflation and avoid overheating but not move so quickly as to cause a recession.
The Fed yesterday removed the term “accommodative” from its commentary around rates. In other words it now sees rates back in neutral territory a decade after they were slashed to prop up the economy during global financial crisis.
Fed officials appeared sceptical that Trump’s tax cuts will result in a long-term boost to economic growth.
While they raised projections for expansion this year and next, they predicted that growth would slow to 1.8 per cent by 2021. The Fed also has to grapple with the ramifications of Trump’s trade policy with tariffs on Chinese goods threatening to slow growth and boost inflation.
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