Critical Analysis: Australia's Cash Rate and US Federal Reserve Impact

This report critically examines the relationship between Australia's cash rate and the US Federal Reserve Fund's rates, analyzing whether movements in the latter drive movements in the former. It uses summary statistics and pairwise graphs to illustrate the dynamics between the two rates. The analysis reveals that US Federal Reserve decisions significantly influence Australia's cash rates, impacting the value of the Australian dollar and various sectors, including housing and labor markets. The report predicts a potentially recessive state for the Australian economy, moderated by the stabilizing influence of Federal Reserve rate changes, which have lowered asset and commodity prices. Despite potential challenges such as low purchasing power due to reduced wages, the availability of resources at lower costs may attract investors, leading to a moderate and acceptable economic impact even in a recessionary scenario. This report is for informational purposes only, and Desklib provides a platform for students to access similar solved assignments and study resources.

Critical Review – Research Project
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Contents
Critical Review – Research Project....................................................................................................1
(4) Discuss the relationship between Australia's cash ratio and the Federal Reserve Fund's rates in the
US. Do movement in the Federal Reserve Fund's Rates net derive movements in the cash rates?
Illustrate the discussion with summary statistics and pairwise graphs of cash rates and Federal
Reserve fund’s rates..............................................................................................................................3
(5) Based on your summary statistics, graphs and analysis and discussion above, write a short
prediction on the microeconomic outlook of Australia. Is Australia likely to experience a recession or
expansion soon?....................................................................................................................................6
References.............................................................................................................................................8
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(4) Discuss the relationship between Australia's cash ratio and the Federal Reserve
Fund's rates in the US. Do movement in the Federal Reserve Fund's Rates net derive
movements in the cash rates? Illustrate the discussion with summary statistics and
pairwise graphs of cash rates and Federal Reserve fund’s rates.
Cash rates can be explained as the rates at which the rates that have been charged by the
reserve banks to the Australian banks over the overnight loans provided to them. Australia
has been using quite an inflated target as compared to others that have been 2 to 3 percent per
year (Letts, 2018). This monetary policy influences the policy of its financial market
operations. There are certain federal rates that help the banks of other countries by providing
the overnight loans at certain rates. In order to deal with the growing recession, there is zero
interest rate policy that has been applied to the federal norms, in 12 months the reduction in
basis points were around, 425 points. For nine years the fed rates remained on zero interest
rate, thus this has helped Australia also to fight with the recession at that time. On comparing
the cash ratio of Australia with the Federal Reserve ratio it was observed that-
 As per the latest scenario, the rate has been decreasing, which means that Australian
dollar is losing its importance in the market, thus can go below the US rates.
 As per WESTPAC, the interest rate of US has been increasing at a rate of 3 times a
year which will further increase next year; this will strengthen the economy of
Australia.
 As per reports, the US will keep its cash reserves steady this year thus it will help in
maintaining the cash reserves of Australia.
 The changing federal rates will decrease the unemployment by 3.8% in Australia in
coming years, thus this help in lifting the US inflation rates and the pressure on
wages.
 As per the gap in the Australian labour market as compared to that of US market it is
expected that the US will not raise rates in new future (Letts, 2018).
 Since RBA is concerned about the financial stability of Australian housing rates, the
change in monetary policy will tighten and increase the risk and slow the customer
demands eventually. The fall will be around 10% as compared to the previous data.
The fact is Australia has borrowed so many amounts from the federal banks that it is
going to be very difficult to stabilize the housing rates. But the lowering rate on
Australian dollar will help in maintaining the assets in future (ShoreFinancial, 2018)
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 The eventual decrement in the cash rates of Austria will eventually decrease the value
of the Australian dollar that is what is needed to be done with Australia. This will
increase the value of the asset in the international market, which will strengthen the
currency in the overseas market (ShoreFinancial, 2018).
 As the capital borrowing market Australia is now in need to get better and stable
investors in the coming time, this will strengthen the position globally. It may occur
that the yield or the price of yield is below the yield of US, thus this explains that
investors will be more comfortable with that as the US has been having underpinned
commodity demands (Borio, & Hofmann, 2017).
 It is also said that the increase in the federal rates increases as due to the consumption
of the personnel expenditure had increased up to 2% in last few years.
The above-mentioned points derive the following points on federal rates over cash rates of
Australia-
 The Federal Reserve decision of US has influenced the cash rates of Australia such
that it has lifted the cash rates of Australia by 1.5%.
 It has been 18years since the federal rates of US were boasted higher to that of
Australia.
 The increase in the value of US dollar has reduced the value of Australian dollar and
thus leading to its cheapest value till now.
 Fall in the Australian economy will mean that the reserves like coal reserves, iron ore
reserves, gold mines; they will be available at cheaper rates.
 The forecasting tells that the commodity prices will remain stayed even if the value of
the Australian dollar decreases in coming time.
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As per the above mentioned graph that can be explained as cash rates has been decreasing for
some time till the year 2009 , then with decreasing US Federal Rates from that time, the
value to Australian Dollar also decreased eventually , but that will strengthen the position in
the global market eventually((Borio, & Hofmann, 2017).
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(5) Based on your summary statistics, graphs and analysis and discussion above, write a
short prediction on the microeconomic outlook of Australia. Is Australia likely to
experience a recession or expansion soon?
As per the discussion is done in the above part it can be said that the increase in federal rates
can affect the value of the Australian dollar. This has been a core factor of dropping the value
of Australian dollar below the value of US dollar. This has affected many sectors of
Australia. The inflation rates have affected the housing sector of Australia; the inflation rates
have decreased the housing development sector of the same. This has also affected the
development and the land rates (Smales, 2012).
Moreover, there has been some effect on the labour market; the unemployment has reduced,
but the cost of labour has also reduced considerably. The immigration has also been affected
by the inflated fed rates. High commodity prices have also affected the Australians
commodities values globally. Also, commodities like coal and oil have also affected the
value. In the coming time, the saving ratio will be assumed relatively stable. There are certain
factors that will affect the non-mining activities, the lowering GDP of Australia depicts the
fall in the coal and oil industry eventually. Although the latter part of the year sit is expected
that the price and value of the non-mining activities will improve as the cash rates improve
(Borio, & Hofmann, 2017).
Although there is drop in the household consumption which is affecting the price and
consumption of such commodities. The downfall in the rates also depicts the downfall in the
production activities as the cost of production is also low, partially due to the low value of the
Australian dollar. This inflation has raised the value of the house and non-commercial
building in the urban areas, but in the rural areas the price is reducing considerably, this may
be due to a low rate of the wages.
All the above discussion stated that the Australian economy has been into a recessive state
but the support if the federal rate and the change in the rate have inflated the US dollar rates
and has gradually lowered the value of Australian dollar. This has reduced the prices of assets
and commodities of the system. The lowering rates of the wages have depicted the low
purchasing power but the availability of the resources will be easy and also at low cost.
Demand will not affect it if the investors will be more interested in the same (Smales, 2012).
This shows that even if a recession comes the Australian economy will already be in a stable
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position to work. The effect on the economy will be moderate and acceptable (Moessner, et.
al., 2017).
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References
 Borio, C.E., & Hofmann, B., 2017. Is monetary policy less effective when interest
rates are persistently low?
 Letts, S., 2018. Will the Australian dollar get crushed as US interest rates storm
higher? [Online]. Available at: http://www.abc.net.au/news/2018-03-01/will-the-
aussie-dollar-get-crushed-by-soaring-us-interest-rates/9492272 [Accessed: 25 May
2018]
 Moessner, R., & Jansen, D.J., & de Haan, J., 2017. Communication about future
policy rates in theory and practice: A survey. Journal of Economic Surveys, 31(3),
pp.678-711.
 ShoreFinancial, 2018. US interest rates increasing & the effect on Australian interest
rates [Online]. ShoreFinancial. Available at: https://shorefinancial.com.au/us-interest-
rates-increasing-the-effect-on-australian-interest-rates/ [Accessed: 25 May 2018]
 Smales, L.A., 2012. RBA monetary policy communication: The response of
Australian interest rate futures to changes in RBA monetary policy. Pacific-Basin
Finance Journal, 20(5), pp.793-808.
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