BILL'S BITES: Reflections on the US

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.

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