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The US just cut interest rates. Should we care what the Yanks are doing?

The United States (US) Federal Reserve started cutting its overnight cash rates a couple of months  ago. This is the interest rate that commercial banks in the US have to pay for overnight loans. It’s quite an important number because it sets a basic benchmark which helps to determine the rate individuals, banks, companies and others will be charged to borrow money. It’s the same thing here in Australia, but those rates are determined by the Reserve Bank of Australia.

Should we care what the US is doing with its interest rates when they are on the other side of the planet from us? The short answer is that unfortunately what they do over there does have a big impact on us here in Australia. The world’s financial markets are very inter-connected. A rock thrown into one area of the pond has a ripple effect in other areas. The US is the largest economy in the world and it’s the market that many investors turn to when they are looking for a place to invest their savings given its perceived safety. The expected return available in that market is compared to the returns on offer in other markets.  If the US lowers its short-term cash rates faster than we do, then all other things being equal Australia would become a slightly more attractive place to invest. The chart below shows that for the last two years interest rates in the US have been higher than in Australia which is part of the reason why the Australian dollar has weakened relative to the US dollar.

Source: Bloomberg

Global investors will shop around for the best return in the same way as we might when we are looking for a mortgage or to place a term deposit. Given its size in the global economy and its status as a “safe haven”, US behaviour is closely followed by market participants around the world. Hopefully they don’t drop a boulder in the pond anytime soon.

Mark Mitchell

The Responsible Entity is Perennial Investment Management Limited ABN 13 108 747 637, AFSL: 275101. The Investment Manager is Perennial Value Management Limited ABN 22 090 879 904 AFSL: 247293. This promotional article has been prepared by ETF Investments Australia Pty Ltd trading as eInvest Australia (‘eInvest’) ABN: 88 618 802 912, as the corporate authorised representative of Perennial Investment Management Limited. This promotional article is for information purposes only. Accordingly, reliance should not be placed on this information as the basis for making an investment, financial or other decision. This information does not take into account your investment objectives, particular needs or financial situation. While every effort has been made to ensure the information is accurate; its accuracy, reliability or completeness is not guaranteed. Past performance is not a reliable indicator of future performance. You will be able to download the PDS from www.einvest.com.au