‘The Fed lifts the official Interest Rate’, and what this means for Investors and Australia?
The Federal Reserve of the United States has lifted its interest rate from 0.5% to 0.75%, which reflects a confident outlook on US economy as it begins to recover. This rate increase is the second increase since the 07 – 09 financial crises.
Why did they increase the rate?
The Fed’s decision to finally lift rates is signalling that the US is on a path to a growing and prosperous economy. Commentators say that one of the influencing factors was the prospect of the Trump Government implementing tax cuts and government spending increases.
Jobs growth in the US is improving, with unemployment at 4.6%; a 9-year low. It is believed that the labour market is operating as close to or at full employment.
The Fed expects inflation to rise to 1.9% in 2017 from 1.5% this year, and to its target of 2% in 2018 which implies that there is a level of confidence in the US economy.
10-year US Treasury notes are above 2.5% for the first time in two years, making Treasury notes a more favourable investment.
What does this mean for Australia and Investors?
Rates In Australia – The Fed lifting the interest rates is signalling that there is confidence in the US economy, which is good for Australia but does not mean that the RBA will increase rates. Many economists predict that the RBA may indeed cut interest rates again in 2017.
Aussie Dollar – As the US Fed increases its interest rates it means the Australian Dollar will likely remain low compared to the US Dollar; bad news if you want to travel to the US. However a low Australian Dollar is actually good for the economy, as it means our exports are cheaper on the world market which would provide a well needed boost to Australian businesses and the economy.
Investment in Australia – It’s also good news for Foreign Direct Investment, as with a low Australian Dollar, more overseas investors and companies will invest money into Australia and again provide an injection into the economy.
Australian Shares – For the Australian share market we will likely see ‘more of the same’. Exporting industries are likely to benefit from a low dollar, whereas importing industries will hurt. As the economy restructures from the mining boom, there will be ups and downs in all sectors throughout the economy.
The increasing of the interest rate in the US does not mean putting everything into the US Share market. Shane Oliver, Head of Investment Strategy at AMP Capital says ‘other markets remain more attractive than US Shares – notably Eurozone and Japanese shares that will benefit from lower currencies’.
There is always ‘noise’ that affects markets and investments. It is important to look at one’s financial goals and objectives and take into account the long term view for your investments. Investors should ensure that their portfolios are well diversified across asset classes and within asset classes, that all geographies are considered, and keeping in mind the long-term perspective.