Five takeaways from the Federal Reserve decision

Investors have often talked about the global economy since the crisis as reflecting a "new normal" of slow growth and low inflation. But, just maybe, we've really returned to the old normal. Photo: Bloomberg

The decision by the US Federal Reserve to end its long period of near zero interest rates, to lift rates for the first time in almost a decade, was welcomed by investors. But how will this monumental move by the central bank of the world's biggest economy affect Australia?

Here are five takeaways for Australian investors.

Gradual is the word

What are the takeaways for Australian investors from the first US rate hike in nine years? Photo: Andrew Harrer

In case you missed the key word from the Janet Yellen's press conference on Thursday morning, the Fed chair was at pains to reiterate the pace of subsequent rate rises would be gradual, and accommodative and data dependent. 

The key was to not spook markets too much, evidenced by the fact that after an initial responsemost markets returned to normal transmission following the press conference. 

Markets should in theory suffer little disruption from the moves. In Yellen's own words: "Were the FOMC to delay the start of policy normalisation for too long, we would likely end up having to tighten policy relatively abruptly at some point to keep the economy from overheating and inflation from significantly overshooting our objective.

Fed Rates over time.

"Such an abrupt tightening could increase the risk of pushing the economy into recession."

Glenn Stevens is still chillin'

Back in November Reserve Bank of Australia governor Glenn Stevens rebuked calls for another rate cut amid fresh lows in the price of iron ore, saying "we've got Christmas, we should just chill out, come back and see what the data says" at the next meeting in February.

Stevens' contentedness with rates at a historically low 2 per cent jars with the Fed which has had the burning spotlight on it for months. 

The Australian dollar fell, then pushed higher, ultimately returning to pre-Fed decision levels.

AMP Capital chief economist Shane Oliver said Australian rates had historically followed US, but the two central banks have diverged recently. 

"With the Australian economy on a weaker trajectory relative to its potential than the US economy, the RBA will not be following the Fed into a rate hike," he said. "In fact, the odds remain that the RBA will have to cut again as the mining boom continues to unwind, the contribution to growth from housing starts to peak next year and inflation remains low."

Vanguard Australia economist Alexis Gray also sees no lift from the RBA in sight in the near term. 

"Australia is navigating a difficult transition from mining investment-led growth to broad-based growth and will require accommodative monetary policy for some time," she said. 

Goodnight Aussie dollar

The Australian dollar had a kick upwards as US dollar traders interpreted the Fed's statement as more easing than hiking biased. It soon settled back into the low US72¢ mark but few, if any, experts believe it has any more strength in it. Local monetary policy is still in an easing mode, albeit rates haven't moved since May, while commodity prices show no signs of recovery. Further interest rate rises in the US should keep its dollar strong. 

"As the Fed undertakes more albeit gradual rate hikes next year, the RBA retains an easing bias and commodity prices remain weak the trend in the Australian dollar is likely to remain down with it, heading to around US60¢ sometime in the next 12 months," Dr Oliver said. 

"I don't think there's any upwards trend in the Australian dollar," Wingate Asset Management chief investment officer Chad Padowitz said bluntly. 

Wake up Santa, it's your turn!

Local fund managers took the very well-signposted event as removing the uncertainty that has been causing market volatility in the past few months as the Fed held fire. 

"Over the past few weeks it had become increasingly well communicated that the US Fed would raise rates but that it would be a significantly gentler cycle. They did not disappoint and the market responded accordingly," Katana Asset Management portfolio manager Romano Sala Tenna said. 

The S&P 500 closed 1.5 per cent higher and the Australian sharemarket took the strong lead, posting a similarly strong Thursday session. 

"Markets can deal with most things but not uncertainty. The move overnight not only provides certainty on the current rise, but also a clearer view on their future intent."

There are macro clouds gathering, he said, but the Fed should now remove any impediment to the traditional Christmas market rally. 

It's not all roses for the global economy

Just because the US economy is on track, albeit tentatively, to growth, inflation remains well below the Fed's 2 per cent target rate, something Yellen was at pains to emphasise. 

The story is bleaker, particularly for commodities, with oil and iron ore prices at multi-year lows and demand from China, which is the biggest driver of demand for global commodities, weak. 

Emerging market debt levels are also causing dramas and the credit markets were showing signs of stress, evidenced by the high-yielding "junk bond" selloff in recent weeks, Mr Sala Tenna said. 

At home, house prices, which experts waver from labelling as "crashing" or "cooling" but definitely not "rising", and the transition out of mining investment were key challenges faced by local investors.