As the largest economy in the world, the United States exerts extensive spillover effects on other countries through its economic activities and financial market conditions. As an open economy, Australia is naturally influenced by U.S. economic growth, consumption levels, and investment trends. Therefore, by analyzing expectations for potential interest rate cuts or hikes by the U.S. Federal Reserve, we can predict international financial market responses and whether Australia might adjust its interest rates in tandem with the U.S.
In July, the U.S. reported non-agricultural employment of only 114,000, significantly below the market expectation of 175,000 and lower than the previous month's 200,000. Additionally, the U.S. unemployment rate rose to 4.3% in July, marking a four-month consecutive increase. Consequently, the market has substantially increased expectations for a Federal Reserve rate cut. Prior to this, uncertainties regarding the duration of the potential rate cut window had led to multiple speculative fluctuations in expectations.
Historically, the Federal Reserve's interest rate cuts during periods of economic downturn have often been associated with economic crises. For example, during the 2008 financial crisis, the Federal Reserve's rate hikes contributed to the bursting of the financial bubble, which led to a financial crisis. During the subsequent rate cuts, low prices were utilized to acquire assets, a phenomenon sometimes referred to as the "dollar tide." If a new financial crisis were to erupt in the U.S., the worst-case scenario could be as severe as the disruptions observed in 1929 or 1974. In such a case, would the Reserve Bank of Australia adopt a similar rate-cutting policy as the U.S.?
Overall, due to the high level of global economic integration, the trends in the U.S. economy and financial markets have significant impacts on Australia. Participants in financial markets, policymakers, and investors need to closely monitor U.S. economic conditions and policy changes to better anticipate and respond to shifts in the Australian market.