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BILL'S BITES: Reflections on the US

08:06pm February 21 2020

Westpac chief economist Bill Evans discusses the outlook for the US economy and monetary policy. (Josh Wall)

Having just returned from the US visiting a range of Westpac customers, Federal Reserve Bank officials and economists, it was clear there is interest from abroad in Australia at the moment given the view the coronavirus will have a notable impact upon countries in this region. 

But of greater interest to me was the outlook for the US economy and monetary policy. 

During the two-week trip, two main views became clear. 

There are those who believe the US economy is going to continue at quite a strong pace and the Fed will be able to hold the line on interest rates. Others, like ourselves, believe that the US economy will slow under the weight of a weakening consumer and a slowdown in global growth. 

There are a few points to consider. 

Firstly, because the Fed has been unsuccessful in pushing inflation towards its own target of an average of 2 per cent (currently running at 1.6 per cent), if the economy was to slow down then the Fed would have very little choice in my opinion and start cutting interest rates.

Second, the market also believes that the Fed is incredibly sensitive to the share market. So, if there were to be a substantial fall in the sharemarket, the Fed would see that as being an indication of a slowing economy and that it would be necessary for them to act as well. 

The final point is that the Fed is prepared to accept the fact that it has to address its inability to reach its inflation target for some time and continue to say the target in future will be an average around 2 per cent.

What that means is that given the extended time inflation has been running well below 2 per cent, it will need to spend a fair bit of time above 2 per cent before the Fed would even consider raising interest rates. 

So, the general view is that while there’s a debate about whether interest rates will remain steady or fall, no one believes that the Fed will be raising interest rates. As a result, people remain fairly confident about the share market and the outlook for the economy, given the sense that if things were to slow the Fed has ammunition to cut rates.

This material contains general commentary, and market colour. This material does not constitute investment advice. This information has been prepared without taking account of your objectives, financial situation or needs. We recommend that you seek your own independent legal or financial advice before proceeding with any investment decision. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The ultimate outcomes may differ substantially from these forecasts. Except where contrary to law, Westpac and its related entities intend by this notice to exclude liability for this information.

William (Bill) Evans is Westpac’s economic spokesman and is responsible for all of our economic research. In 1991, Bill joined Westpac as the Chief Economist and Head of Research. A graduate of Sydney University (BEc. Hons I and University Medal) and the London School of Economics (M. Sc.), Bill has worked as Research Manager for the Reserve Bank of Australia and as a Treasurer at the Commonwealth Bank of Australia. Bill travels frequently, advising Westpac’s customers on the Australian economy and financial markets.

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