WEEKLY E-MAIL

24 September 2024

FEDERAL RESERVE CUTS INTEREST RATES

By Rebecca Dhillon

Last week, the US Federal Reserve cut interest rates for the first time in 4 years, reducing rates by 0.5%. According to Federal Reserve Chair Jerome Powell, the move was made as a “recalibration” to account for the sharp decline in inflation.

According to the post-meeting statement, “The Committee has gained greater confidence that inflation is moving sustainably toward 2 percent, and judged that the risks to achieving it’s employment and inflation goals are roughly in balance”.

While many economists believed the Fed would start to cut rates before inflation hits 2% given the long lag time between interest rate movements and the effect on the economy, the size of the cut surprised with many expecting a 0.25% reduction.

Policymakers also expect rates to be cut by a further 0.5% before the end of 2024.

Meanwhile last week, the Bank of England kept interest rates steady at 5.0% and remains cautious of future rate cuts. The Bank of Japan have also held rates steady, although any changes to rates in the future are likely to be in the opposite direction, following a rate increase in July.

What does it mean for Australia?

The Fed’s interest rate cut makes the Reserve Bank of Australia’s (RBA) cash rate target (currently 4.35%) relatively strong compared to US interest rates.

While there has been speculation the RBA may follow suit and cut Australia’s interest rate at its upcoming meeting, Government Services Minister Bill Shorten said that this was unlikely to happen. “It is significant that the Fed has decided to lower interest rates in America by half a per cent, but our economies are not identical, so how long that takes to flow through, and the impact that has, remains to be seen”.

Economists expect interest rates will be kept steady at 4.35%, after stronger than expected unemployment data shows unemployment remains steady at 4.2% in August, with the number of jobs added to the economy almost double what was forecast.

Despite unemployment tracking in line with RBA forecasts, it is predicted that any reduction to interest rates is unlikely until December 2024 at the earliest, but most likely in the first quarter of 2025.

Rebecca Dhillon
Senior Para-Planner
Authorised Representative No. 453075

If you have any questions or comments, please email me at rebecca@gfmwealth.com.au

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