Why is the US economy doing well when NZ languishes? Kiwi weighs in on cash rates, GDP

Federal Reserve Board Chair Jerome Powell. Photo / Mark Schiefelbein, AP

A relatively strong United States economy should bring benefits to Kiwis even if there’s little chance of bilateral trade opening up, an economist says.

The US central bank today kept its key interest rate in the target range of 5.25 to 5.50 per cent.

The Federal Reserve made the rates announcement this morning, New Zealand time.

Its key decision-makers said US economic activity was expanding at a solid pace and unemployment was staying down.

The obvious party-spoiler in the States was inflation. The US consumer price index (CPI) for all urban consumers when measured in February was 3.2 per cent, year-on-year.

That and other credible inflation measures were still well above the Fed’s desired 2 per cent.

Meanwhile, New Zealand today registered a 0.1 GDP decline in the December quarter, the second successive quarterly contraction.

Westpac senior economist Darren Gibbs said US consumers were often in a better position now than their Kiwi counterparts.

“Their consumer has been way more resilient. They’ve had a lot of fiscal stimulus thrown at them. They’re running a massive budget deficit.

“Households there are sitting on fairly big savings buffers.”

Americans tended to be less focused on property than Kiwis were, Gibbs said.

“They’ve got a lot more money invested in financial assets.”

The Fed now expected US real GDP to grow by 2.1 per cent this year. Back in December, the forecast was just 1.4 per cent.

The inflation forecast was also up, but only slightly.

The Fed now expected core PCE (personal consumption expenditures) inflation of 2.6 per cent, up from 2.4 per cent.

“They look at a price index that comes from the national accounts rather than just the CPI in many ways,” Gibbs said.

Wall St bounced after today’s rates announcement.

“People were fearful the Fed would step back from rate cuts more than they did today,” Gibbs added.

The Federal Reserve’s “dot plot” revealed it intended to cut rates by 0.75 percentage points this year.

‘Bright spot’

Overall, Kiwis should welcome the relative strength of the US economy, Gibbs said.

“It’s positive because obviously not many parts of the world have been doing that well really.”

Europe was languishing and China was sluggish.

“The US is a bright spot. We’re seeing that also in the tourism numbers.”

He said US visitor numbers in January this year were about 25 per cent above pre-Covid levels.

But the United States only comprised about 15 per cent of New Zealand’s international trade, Gibbs said.

And America seemed to have little appetite for trade liberalisation now.

President Joe Biden has made protectionist moves around a Japanese attempt to buy US Steel.

And Gibbs said a Donald Trump presidency would probably be even less enamoured with free trade.

Gibbs said US-China relations were poor and more Americans were disinclined to travel to China.

That meant alternative destinations such as New Zealand could benefit.

Fed goals

The Federal Open Market Committee (FOMC) said it aimed to achieve maximum employment and inflation at 2 per cent over the longer run.

“The committee judges that the risks to achieving its employment and inflation goals are moving into better balance,” the FOMC said.

“The economic outlook is uncertain, and the committee remains highly attentive to inflation risks.”

The FOMC said any change to the federal funds rate - America’s equivalent of the official cash rate - must take into account labour market conditions, inflation pressures and inflation expectations.

“The committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 per cent.”

John Weekes is the online business editor. He has covered court, crime, politics, breaking news and consumer affairs.