When will the Fed raise interest rates?
Aussie banks will soon have access to more affordable cash amid a global economy that is expected to hit record highs in coming months, as the Federal Reserve and the Bank of England begin a major policy meeting on Wednesday.
The meeting is expected start at 3pm local time (NZT) and will be followed by a second meeting later in the day, according to Reuters news agency.
It is understood the Fed will have two sets of rates, one for households and one for corporations.
One set of rates will be the base rate, the other for investment banks and asset managers, Reuters reported.
Bank of America chief executive officer Brian Moynihan, for example, said the bank was not interested in holding rates too low.
“It is certainly not our intention to go as low as we might,” he told Reuters.
Moynihan said the Fed’s aim was to maintain a rate of inflation that was at or below 2 per cent.
Australia’s Bank of America will begin the process of accessing more affordable bank deposits, which could be used for purchasing stocks, bonds or other financial assets, according an executive at the bank.
A bank that wants to open a bank account could need to show a document from its superannuation fund that shows it is in the process, which will be submitted by a bank on the next quarterly financial statements.
Investors may also be required to show proof of a tax refund from their tax return, such as a receipt for the money.
While the Federal government has yet to provide a list of the assets to which bank deposits can be transferred, the Reserve Bank is keen to give Australians access to their savings, which has become a major asset.
This has been a key focus for the central bank, which is set to provide its first rate decision for two months from Wednesday, and is expected also to rule on whether banks need to hold more deposits for a while.
Many of the major banks are already holding a large portion of their cash reserves in bank deposits.
Earlier this week, the central banker told the Australian Financial Review that the Reserve would be open to the idea of letting banks sell their excess cash holdings, though he said that the Fed would be keeping an eye on that option.
If the central banks decision is to allow the banks to sell their surplus cash holdings to investors, that could help the economy.
That would mean that banks could be able to get some of their excess money back from their superannuities, the Federal Government said.
There will also be a move to allow banks to pay interest on excess cash held by banks.
But, unlike the Reserve, the Bank has a mandate to not allow any financial assets to become the primary form of funding for Australia’s banking system.
As well as raising interest rates, the Fed is expected on Wednesday to announce measures that will increase the money supply, including a cut in the $US3 trillion amount of bank lending.
Treasury Secretary Scott Morrison has said he wants to “make sure” the Reserve’s rate decision will be “consistent with the inflation outlook”.
He said the economy is already growing and that the decision to allow a small portion of banks to lend money will not harm growth.
“We don’t want to see any of the economy going into a recession,” he said on Wednesday at a press conference.
“It’s not what we’re trying to do, we’re just trying to avoid that.”
He also said the Federal Budget was not the time for “coddling the economy” and instead should focus on creating jobs.
Morrison said there was no reason why the Reserve should not rule on the issue, adding that it was a decision for the Bank to make.
His comments came as the US Federal Reserve also raised its interest rates.
Federal Reserve Governor Philip Lowe told Congress in Washington on Wednesday that the US central bank would begin raising rates to an annual rate of 0.25 per cent by early September.
He added that the central bankers interest rate decision was “highly likely” to be the first to be announced.
Lowe told lawmakers that the increase would “strengthen the recovery and boost economic activity and growth”.
“The Fed’s rate announcement today is a signal to the markets that the recovery is on track, that it is moving in the right direction, that inflation is improving, that we are on track to have sustained rates above 2 per to 3 per cent in the medium term,” he added. Reuters