Fed policy options: implications for Australia

The FOMC meet over Wednesday and Thursday. Recent events in China have killed the possibility of a rate “lift off” at the September meeting. Current market pricing now has the December meeting as a likely time for the FOMC to hike. The Fed may begin to signal that they are pushing out the intended start of lift off from this year to next, due to a downgrade to the outlook for China. Alternatively, the Fed may begin to signal that the US economy is on track to sustainable recovery and intend to pull forward lift off to October. Further concerns over China growth would place downward pressure on the AUD as bulk commodity prices and our terms of trade were driven lower. Delay in tightening by the Fed, would limit the fall in the AUD as interest rate differentials opened in our favour. If the Fed brought forward lift off to October the narrowing of interest rate differentials in favour of the US would also push down the AUD. Full report (VIEW LINK)