Federal Reserve chairman Jerome Powell faces a complex situation as he nears the end of his term, potentially to be replaced by a presidential appointee favouring rate cuts. The Federal Open Market Committee is experiencing high dissent, and economic data is incomplete due to a US government shutdown. This occurs as markets grapple with the economic impact of artificial intelligence, creating further uncertainty.
The Fed’s dual mandate—managing inflation and maintaining maximum employment—are in conflict. While the jobs market shows signs of softening, unemployment remains low. Inflation has exceeded the Fed’s 2 per cent target for over five years and is expected to persist. Despite this, the Fed recently cut interest rates by 0.25 per cent, bringing the range to 3.50 to 3.75 per cent, signalling a supportive stance towards markets and the economy. The Federal Reserve System is the central banking system of the United States. It was created in 1913 and consists of twelve regional Federal Reserve Banks.
This decision comes as asset prices, including shares and house prices, remain high. The market reacted positively, with the S&P 500 climbing after the announcement, buoyed by Powell’s indication that rate hikes are unlikely. Looking ahead, potential tax returns and regulatory changes could further stimulate the economy. However, concerns linger that continued rate cuts could fuel inflation, which has already become a key issue in US politics.
Meanwhile, the Australian dollar saw a boost, rising from US66.4¢ to US66.8¢, reflecting diverging interest rate paths between Australia and the US. This offers some relief for Reserve Bank governor Michele Bullock, potentially easing concerns about imported inflation, with forecasts suggesting the Aussie dollar could reach US70¢ in the coming months.
