EDITORIAL: US market jitters may be a sign of what’s to come

Things are looking good for a post-Christmas interest rate cut.

Christmas 2025, that is.

Chances of any rate relief before then crashed on Wednesday when the Grinches at the US Federal Reserve hinted they expected to have to pump the brakes on their easing cycle next year thanks to sticky inflation.

That news did come with a rate cut. The Fed dropped its rates another 0.25 percentage points, giving Americans their third consecutive cut.

Good news, right?

Unfortunately, it was the commentary that came with that rate cut that had markets spooked.

“Today was a closer call, but we decided it was the right call,” Fed chairman Jerome Powell said after the meeting.

“From here, it’s a new phase, and we’re going to be cautious about further cuts.”

American central bankers now expect two, not four, rate cuts in 2025.

Analysts expect the Fed to take a wait and see approach to Donald Trump’s presidency, taking a pause on cuts from his inauguration in January.

The impact of the statement from the Federal Reserve was immediate. US markets fell more than 3 per cent.

And it didn’t take long for Australia to follow suit. Markets here lost 2 per cent and the dollar took a dive to 62 cents, its lowest point in a year.

Commiserations to anyone planning on taking an overseas holiday this festive season.

But the effects of a low dollar will go beyond travellers. As business correspondent Jackson Hewett writes in The Nightly, it will increase the cost of imported goods for Australian consumers, which will push up inflation higher.

That could push a cut to the cash rate by the Reserve Bank any time soon off the table completely as they continue to battle to bring inflation back within its target range of between 2 and 3 per cent.

There’s a very real prospect that the cash rate will remain unchanged at 4.35 per cent for the entirety of next year — bad news for mortgage holders, many of whom have been pushed to the limit already.

It’s a grim end to the year for the economy, with this week’s Mid-Year Economic and Fiscal Outlook showing a sea of deficits as far as the forward estimates can see.

Federal spending as a share of the national economy is projected to hit an astronomical 27.2 per cent next year, a level not seen since 1986, with the exception of the two pandemic years. Total spending growth for this financial year is running at 5.7 per cent, making the RBA’s job of pulling inflation back even harder.

If Labor were hoping for a Christmas miracle to wind up 2024 and carry them through to next year’s election, they will be sorely disappointed.

But it’s Australian households that will pay the biggest price.

Stubbornly sticky inflation and high interest rates have already eroded savings balances.

The festive season brings added pressure to household budgets.

All signs point to a tumultuous 2025. But we can hope that it will bring better times to come.