These losses were triggered by the US Federal Reserve’s call that 2025 will see fewer rate cuts than previously expected. The announcement has been felt globally and the Australian Stock Market had its worst trading day in three months. The S&P/ASX200 fell by 1.7 per cent to 8,168.2 points, wiping AUD$50 billion off the value of some of Australia’s largest companies. The Australian dollar also fell to approximately 62 cents, which is a 1 year low.
The Federal Reserve adjusted its key lending rate to between 4.25 and 4.5 per cent; a move which was widely expected. However, the Fed highlighted an ongoing battle with inflation by announcing 2 rate cuts in 2025 instead of the 4 anticipated by economists globally. This news has also had an impact on the US markets, with the S&P 500 and Dow Jones falling by 3 per cent and 2.6 per cent respectively. Recent news has also strengthened the US dollar, causing the Australian dollar to weaken in comparison.
The US Federal Reserve’s reluctance to cut rates next year suggests they expect inflation to remain above their 2 per cent target at least until 2027. Updated forecasts also state inflation will remain above 2.5% throughout 2025.
Despite the pessimism regarding inflation, the US has increased its growth forecast to 2.5 per cent for 2024. This update, alongside improved employment statistics, is sending mixed messages about the global economy. Australia may also receive bad news from the Bank of England and the Bank of Japan in the coming days, which could add further to economic uncertainty.
Of course, all this news coincides with the significant leadership change the US will be undergoing next year, including increases that Donald Trump intends to impose on tariffs. Such a move could rock the economies of countries globally, especially those that rely heavily on exports to America. Many countries are planning on counter-tariffs to help balance the damage, potentially causing an unhealthy global trade war. Such a trade war could have a negative impact on the US economy which would also have repercussions worldwide.
Regardless, Australia’s Reserve Bank will be monitoring developments closely so they can react accordingly where possible. And amid the uncertainty, there are some glimmers of hope that the Australian economy is well on the road to recovery with low inflation and solid security overall.
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