The US Federal Reserve’s latest verdict on monetary policy this week will be a key plank in the rate decision of New Zealand’s central bank scheduled for May 8.

It was the Fed’s u-turn early this year, going from promising two interest rate hikes this year to promising to be “patient,” that helped inform similar decisions by other central banks around the world, including our own Reserve Bank. Investors are now fully pricing in a US rate cut within the next 12 months.

When Reserve Bank governor Adrian Orr changed his stance from neutral to saying in late March that a rate cut is more likely, he cited developments around the world and particularly amongst some of New Zealand’s key trading partners.

“This weaker outlook has prompted central banks to ease their expected monetary policy stances, placing upward pressure on the New Zealand dollar,” Orr said on March 27, making it clear he wasn’t happy about the currency rising.

The Fed will deliver its latest statement early on Thursday morning, New Zealand time. Markets will be looking to see what it makes of very strong GDP numbers released last week that showed US economy grew at an annualised pace of 3.2 percent in the March quarter, way above economists’ predictions of 2.3 percent growth.

“The Fed meeting will be really important because the change of stance from the Fed has probably been the single biggest driver” of financial markets since late last year, says Mark Lister, head of wealth research at Craigs Investment Partners.

Share markets around the world had been tanking through December and the Fed’s u-turn was a major factor in the S&P 500 Index’s rebound this year – it finished last week up 17.3 percent year-to-date and finally surpassed last September’s record levels.

New Zealand’s own S&P/NZX 50 Index also struck a fresh record early last week, although it subsided to being up just 0.4 percent for the week and 13.3 percent year-to-date – or 6.6 percent if one strips out the dividends which aren’t included in most stock indices.

“The expectation is, despite all the positives that we’ve seen, such as the GDP report and financial markets improving, markets are still pricing in a rate cut in the US,” Lister says.

“If we get any sense of hawkishness coming out of the Fed, that could definitely throw a cat among the pigeons,” he says.

“But I don’t think they will. I think they’re going to stick to that cautious commentary. I don’t think they will want to rock the boat too much. If the markets get a whiff of them changing their minds again – we’re at record highs in share markets and there are interest rate cuts prices in – it wouldn’t take a lot to disturb that if they don’t choose their words very carefully.”

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