At its latest September meeting, the Federal Open Markets Committee (FOMC) gave markets pretty much what was expected; no rate change and the beginning of quantitative tightening (QT).
While both were expected, there was also a sting in the tail as well. As ANZ put it, “The Fed did not surprise [us], but the underlying signal was more hawkish than markets expected, shooting the USD higher…Yields pushed higher as the Fed gave the signal for a December rate hike…”
The odds of another U.S. rate rise this year have shortened. According to Federal Funds futures contracts on the day prior to the FOMC statement, traders had placed a 57% chance on a December rate increase. By the close of business on the next day, the probability had jumped to 71%.
If the U.S continues at this pace, the official U.S interest rate will be above the Australian cash rate. Undoubtedly, Australian exporters would be happy and so would the RBA; a stronger currency has been offered as an impediment to Australian economic growth in more than a few minutes of RBA Board meetings.
