The real rates decision Australians should be watching is the US Federal Reserve this week

The US Fed’s rates decision is the real factor in how their economy, and by extension ours and our interest rates, will perform.

Federal Reserve Board Chairman Jerome Powell.

All the media focus – pulsating hysteria, might be more accurate – has been on the Reserve Bank’s Cup Day interest rate decision.

But a far more important decision, which will actually have a much bigger impact on your lives – even, including those of home loan borrowers, fretting on another RBA rate hike – surfaces early Thursday morning our time.

This is when the Fed – the Federal Reserve, the US version of our RBA – has its rate decision.

It’s at 5.25 to 5.5 per cent (the Fed always has a range). As opposed to the RBA’s 4.1 per cent.

Crudely, will the Fed hike into a US economy showing surprisingly strong growth, threatening to slow or stop the required fall in US inflation to the Fed’s target of 2 per cent?

Or will it pause into the – economic and financial - uncertainty flowing from the events in the Middle East? On the basis that who knows how far, and how quickly, they could erupt?

Wall St has been nervously betting on a pause, with the Dow progressively edging down, but not plunging.

This had taken Wall St into so-called (and these days, all-but meaningless) ‘correction’ territory – an aggregated fall of more than 10 per cent. Before a strong, 500-point, Dow bounce-back overnight Monday.

It’s not just that the Fed sets interest rates not only directly for the US but effectively for the world; although it is the two and ten year US bond yields, rather than the Fed’s policy rate, that are the more important.

Indeed, those yields play directly into our bond yields and determine the interest cost of a big chunk of the money our banks borrow, directly impacting their lending rates, both for homeowners and for business.

Of course, as banks get more than 60 per cent of their money from depositors, it is what they pay on deposits and so the RBA’s official rate that is the biggest factor.

But the biggest impact of the getting it ‘right’ or ‘wrong’, is, obviously on the US economy and into the global economy.

At the back end of the 1970s, famed Fed head Paul Volcker took the tough decisions to hike to nearly 20 per cent and crush the endemic, global, double-digit, inflation of the 1970s - setting up the golden (and, greed-is-good, gilded) decade of the 1980s.

This might well be instructive for us.

Despite taking the Fed rate to 5.25-5.5 per cent and significantly above the (about) 4 per cent US inflation rate, the US economy has been very strong.

In contrast, our 4.1 per cent official rate is below the 5.4 per cent annual inflation rate – so we have a negative real rate – although it is on par with the 4 per cent annualised inflation rate of the September six months.

It’s also of note that all the Fed decisions this year have been unanimous. Not one dissenter – wanting either slower rate hikes or faster ones.

Fed head Jerome Powell has sent mixed messages; a bit like our Michele Bullock.

The Middle East should see him pause.

Originally published as The real rates decision Australians should be watching is the US Federal Reserve this week