Us Fed To Emulate Australian Paradigm

Sydney Morning Herald

Thursday January 5, 2006

Jessica Irvine

L-PLATE US Federal Reserve chairman Ben Bernanke might find Australia's Reserve Bank governor Ian Macfarlane a better role model than his immediate predecessor, Alan Greenspan, when he takes up the world's most powerful economic post next month.

Minutes released from the US central bank's last policy-setting meeting for 2005 indicate it intends to emulate its Australian counterpart by halting interest rate rises and entering official "data watch" mode.

A longstanding reference to US monetary policy being too "accommodative", ie, too stimulatory, was removed from the December minutes, leading markets to brace for a pause as soon as March.

The Australian dollar jumped to a two-week high yesterday as markets moved to factor in a lower return on US dollars. The $A closed at US74.19c.

A pause would bring an end to a year-long campaign by the Fed to bring US interest rates to more "normal" levels after they were slashed back to 1 per cent to stimulate activity in the wake of the 2001 recession. US interest rates now stand at 4.25 per cent.

In the meantime, Australian interest rates have been gathering dust at 5.5 per cent since last March, the only time it was raised in the past two years.

The chief markets economist at National Australia Bank, Rob Henderson, said US interest rates would probably be lifted again at this month's meeting but warned that "after that, the outlook becomes quite data dependent".

But further increases are on the cards, with the US economy as yet to attain the state of "nirvana" used by Dr Macfarlane to describe the Australian economy.

Unlike Australia, which has negotiated a surprisingly stable end to its housing boom, the US economy is home to a still swelling property market bubble.

Fuelled initially by the availability of cheap loans, a tradition of taking out fixed-interest loans has made American homeowners relatively impervious to the Fed's successive increases.

Fed board members raised concerns about the US housing sector at the December meeting, saying they were yet to witness any "significant weakening", the minutes reveal.

But analysts cautioned against assuming any sustained weakness in the US dollar after the release of the minutes.

"It would be wrong to assume that the US dollar would be mortally wounded by the end of the Fed's tightening cycle," Westpac currency strategist Richard Franulovich said.

© 2006 Sydney Morning Herald

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