Federal Reserve increases rates 75bp

Overnight the Fed raised rates in the USA by another 75bp to a target range of 3.75% to 4.00%. This was not a surprise, a fourth consecutive 75bp rise had been widely anticipated, as inflation indicators in the USA stubbornly refuses to roll over.

While there was some new wording in the Fed's statement, which hinted that we may be approaching a slow down in the hiking cycle, Powell made it very clear in his press conference, that it was far to early to be talking about a pause in the rate cycle.

“What I am trying to do is make sure our message is clear, which is that we think we have a ways to go, we have some ground to cover with interest rates, before we get to that level of interest rates that we think is sufficiently restrictive,” Powell said.

What this means is the Fed may slow the pace of rate increases going forward, but expects the terminal rate to be higher, and to be with us for longer, than previous forecasts.

For Australia this likely means more pressure on the Australian dollar as the Fed continues to raise rates faster than the RBA.

High resource prices, coupled with strong resource demand, have kept the AUD from falling too far during this hiking cycle. However, there are signs that some of that resource demand is coming off, and without that support, or a more hawkish turn from the RBA, I expect the AUD to slip further.