US Rate Rumours

Whispers that the US Federal Reserve had changed its outlook on monetary policy from neutral towards a bias of tightening rates has led to some hectic activity on both US and Australian markets causing share prices to fall 1.3% and bond yields to rise sharply. The Australian dollar also dropped to its lowest level of US64.34 cents since January 13.

However there is a school of thought that the Chairman of the US Fed, Dr. Alan Greenspan is using the market rumours as a method of taking the heat out of the US sharemarket without actually moving rates. By merely hinting that a rate movement may be necessary Dr. Greenspan has probably already achieved his desired result of slowing down the rising market without having to actually follow through.

If this is the case, and it’s happened before, then the news for the Australian dollar and our own interest rates is that they should remain stable and perhaps even allow our Reserve Bank some room to even consider a reduction should further market data point in that direction. However don’t expect any movements resulting from next weeks meeting. This latest news from the US is only going to further cloud the RBA’s decision making process and give them more reasons to leave rates on hold until a clearer picture of the direction our economy is heading emerges.

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