FOMC announcement, Thursday, 19 March 2015
The notes of the FOMC were released in the USA, with the key word “patient” being removed from their stance on interest rates. As market participants had anticipated, this leaves the door open for a possible rise in US official rates in June.
However, Janet Yellen, Fed chair, has been measured in her wording in the press conference. She has stated that while removing the word “patient”, this does not mean the Fed will become “impatient”, and that they will need to see further indications of improvement in economic conditions before any rate rise would occur. The US market rallied following her comments, and the dollar tumbled. The AUD is up 2.2% to $0.7783 this morning.
Leading into today’s announcement, the focus had been whether the word “patient” would be removed (with a removal indicating a potential rate rise). Although the word was removed, the Fed’s own rate projections were slashed.
From an Australian perspective, the US moving closer to a rate rise puts less pressure on the RBA to act to lower rates here. Although it appears to be a foregone conclusion for many that official Australian rates will be cut by another 0.25% at the next meeting, this may not necessarily be so.
Recent indicators have shown an up-tick in the domestic economy and a mild improvement in unemployment. With the recent rally in the USD (leaving aside overnight moves) pushing the AUD lower, the RBA may well allow market forces to do its bidding. Without having the fire power (or need) to participate in the global currency wars against Japan and the Euro Zone, the RBA may well stay the course…..and become more “patient”.
Comment from David Lane, director of Wealth Management at Pitcher Partners.