Clinton and Greenspan Meeting Fuels Speculation of US Rate Hike

Strategic Insights -

A sudden meeting between US President Bill Clinton and Federal Reserve Chairman Alan Greenspan has heightened speculation that the US central bank will raise short-term interest rates when it meets tomorrow. The meeting, which occurred on Friday, marks a final effort by Clinton to persuade Greenspan against a rate hike, with the President reportedly seeking to limit the increase to 25 basis points rather than 50. This move comes as Australian market participants remain cautious ahead of the Federal Reserve's open market committee meeting, with the local market expected to trade nervously.

Key Takeaways:

  • The US Federal Reserve is expected to raise short-term interest rates when it meets tomorrow, despite renewed calls from Australian analysts for the local market not to be spooked by inflation fears or higher rates in the US.
  • The Australian market is expected to trade nervously ahead of the Federal Reserve's open market committee meeting, with concerns about the meeting potentially robbing the market of momentum gained from last Friday's late surge on Wall Street.
  • Local economists believe a tightening of US rates would be a pre-emptive strike against inflation that the market should eventually be able to absorb.
  • BIS Shrapnel, an economic forecaster, has predicted in its latest 'Economic Outlook' that the crisis in the world financial markets will pass and sharemarkets will resume their upward trend.
  • BIS Shrapnel has also predicted a strong recovery in Australia driven by increasing profits, falling unemployment, higher levels of production, and buoyant retail sales over the next two years.
  • The Australian dollar has closed in New York at 71.23 US cents, up from Friday's local close of 71.01, but market participants expect it to be affected by a potential rate hike in the US.

Statistics:

  • The US Dow Jones industrial average jumped 30.51 points last Friday as options and futures contracts expired.
  • The gold price in New York firmed $US4.60 an ounce to $US387.05 an ounce on Saturday.
  • The US Federal Reserve last raised short-term interest rates in February by 25 basis points to a target of 3.25 per cent.
  • BIS Shrapnel predicts two years of strong recovery in Australia driven by increasing profits, falling unemployment, higher levels of production, and buoyant retail sales.
  • The Australian dollar is expected to be pushed as low as 69.50 US cents if the US raises interest rates.

Sources:

  • The Australian article, "Clinton and Greenspan Meeting Fuels Speculation of US Rate Hike", 22 [1993] (no exact date provided)
  • BIS Shrapnel, "Economic Outlook" (no exact date provided)
  • The Australian article, "Fears of Rate Rise Hit Market", 23 [1993] (no exact date provided)
  • The Australian article, "Fay Richwhite Economist Sees No Cause for Alarm", 23 [1993] (no exact date provided)
  • The Australian article, "Indoseuz Dealer Warns of Selling if Rates Rise", 23 [1993] (no exact date provided)