Two different economies at very different stages of their battle against inflation but there are some similarities between the US and Australia, and one glaring disparity.
The similarities are a strong labour market, slowing consumer spending, rising interest rates, signs of ’sticky inflation’ while the difference is that suddenly Australia seems closer to a pause in rates than the US after comments and speeches from the heads of the Fed and Reserve Bank in 24 hours.
In his post meeting monetary policy statement on Tuesday RBA Governor, Philip Lowe hinted that the next rate rise (in April) could be it for a while as the central bank takes time to see how the lead and lags in monetary policy playout. The next rise will be the 11th in less than a year.
Dr Lowe backed up that hint in a speech in Sydney on Wednesday that the bank is “closer to the point where it will be appropriate to pause interest rate increases to allow more time to assess the state of the economy.”
That’s very different to the comments on Tuesday in Washington from Fed chair Jay Powell, who again repeated (for the third time in past many months) that US rates could have to stay higher for longer because inflation was proving to be ‘sticky’.
“If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes,” Powell said.
“Restoring price stability will likely require that we maintain a restrictive stance of monetary policy for some time.”
Those comments sent US markets into a spin, and yet much of the dizziness is their own fault – for months many US investors of all sizes have not been listening to the Fed’s message but merely running their own interpretation of a coming Fed pause as inflation continues to ease.
These ‘experts’ missed the boat completely with the high January jobs number (517,000) and also misread the sluggishness of inflation now that, while it is well down from June’s high of 9.1%, plateaued in January and showed signs of not wanting to shift lower.
Powell’s comments and the data for January sees Friday’s labour force data for February and then the Consumer Price Index for the same month next Tuesday, loom as enormous tests of the US view of inflation – both for markets and the Fed.
Here in Australia, Governor Lowe made it clear that while a pause might be in sight, the central bank has no intention of taking its foot off the rate rise pedal.
“Our judgement, though, remains that further tightening of monetary policy is likely to be required to bring inflation back to target within a reasonable timeframe,” he said.
“Inflation is still too high and while it looks to be on a declining path it is likely to remain higher than target for a few years. If we don’t get inflation down fairly soon, the end result will be even higher interest rates and more unemployment.
“It is a complex environment in which to be making policy decisions, with many of the variables we monitor at near record highs or lows. The inflation rate is at a three-decade high,” he said.
“The unemployment rate is around a five-decade low. Australia’s terms of trade are close to their highest level ever. There has been a record boost to savings over recent years and interest payments as a share of household income will soon be at a record high.
“At the same time, measures of consumer confidence are as low as they have been in a long while. This all means that there is range of scenarios for the economy and there are uncertainties in both directions.”
In many respects there really isn’t all that much difference between the monetary policy stances of the US and Australia – just in the way the heads of the two central banks express their views.
