New US Fed Chief Ben Bernanke has so far not put a
foot wrong. He is in favour of greater openness, plus careful analysis of all
the economic facts on the US Fed “checklist”. He has implied that the Fed must
look at global developments, not just events in the US economy. Tonight the US Fed meets and by the time we wake up
there will be a new reading on the Fed’s thoughts.

Just
about every economist in the world expects another 25 basis point hike
in US cash rates. Most also expect another in six weeks’ time, bringing
US cash to 5%, not much behind Australia’s 5.5%. But with the economic
signals flashing amber – especially recent signs of a softening US
housing market – overall sentiment is that a 5% cash rate might be the
end of US tightening for this cycle.

The rise in US cash rates has been a major factor
in the weakness of the Australian and New Zealand dollars. So far at least,
there has been no great effect on interest rates in general, but this cannot be
too far off in Australia and especially New Zealand if their currencies keep
falling at recent rates.

Tonight’s decision seems clear cut, but the Fed’s
words will be scrutinised carefully. Henry will report in as early as possible
tomorrow. This article provides some useful background.

Read more at Henry Thornton.

Peter Fray

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