April 08 US economy: Rate cuts finished?

Today the US Federal Reserve cut their cash rate by 25 basis points to 2%.  At the same time data was released stating that GDP growth in the US was 0.6% (annualised, seasonally adjusted) in March – a weak number to be sure, but positive and higher than market expectations.

The first thing to take from today’s announcements is that, given the balance of probabilities, rate hikes are finished (see Calculated Risk for a comparison of statements).  Now with inflation running at over 4%, the real interest rate is currently negative – implying that the Federal Reserve is now in a position where it has to be extremely careful.

For New Zealand, negative real interest rates in the US imply that investor interest in commodities (as a store of value) is higher – so this is a good thing.  However, the end of interest rate cuts in the US may see our dollar loss a touch of traction against the US.  This would probably be a good thing for exporters, except that the US is cutting back on its import of NZ goods (see the 27% tumble in the value of NZ exports to the US in March).

On the GDP side, the (relatively) strong performance of the industrial production index and the weak performance in retail did indicate that either exports or inventories were going to have a hell of a quarter.  Instead we got a mix – exports did well, inventories rose.

Looking at the numbers, inventory accumulation appears to be partially payback for the huge rundown in the December quarter.  However, given that none of the analysts I’ve looked at said anything about it, it is likely that inventories were bloated before the December quarter anyways.

What does this mean for NZ – nothing.  Our dollar hardly moved, there is still a feeling we are sitting on a knife-edge with the world economy.