US Rate Cut More Likely

US Fed Chairman Greenspan made a speech last night that provided the strongest indication to date that US rates would be cut in the near future.

Chairman Greenspan has been reported as saying that while the US economy was still relatively strong the risks of a slowing in the US economy had increased and were likely to intensify because of economic and financial turmoil overseas. He said that there was a need to “bring the existing instabilities to a level of stability reasonably shortly to prevent the contagion from really spilling over and creating some very significant further difficulties for all of us”.

Based on these comments the CBA’s Research department are putting the odds at 50% for a US rate cut after next weeks FOMC meeting and believe it to be a certainty by the end of the year.

Whilst this would dramatically increase the chances of a drop in local rates, this would by no means be a foregone conclusion given the current level of the AUD and our relatively strong domestic activity. Then there is also the little issue of the Federal Election coming up in October.

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