The US equities market experienced a significant downturn on Thursday, with the S&P 500 Index plummeting 4.4 per cent. This historic drop, ranking among the worst trading days in fifty years, was reportedly precipitated by the US midterm election results, which saw Democrats gain control of Congress. Concerns are mounting over the potential impact of new Democratic policies, including increased regulation of artificial intelligence and substantial tax hikes, on corporate America and overall economic growth, leading some analysts to draw parallels to the high inflation and volatile markets of the 1970s.
This market volatility coincides with ongoing challenges for the US Federal Reserve, which began its hiking cycle belatedly in September. Core inflation, the Fed’s preferred gauge, has persistently run above its target, reaching 3.1 per cent in September and exceeding the target for over five years. Despite this, markets are currently pricing in a modest 40 basis points of further Fed hikes, with the next move not fully anticipated until March, even as analyses suggest a need for at least another 100 basis points of tightening to curb inflationary pressures.
Closer to home, the Reserve Bank of Australia (RBA) is also navigating complex economic waters amid questions of its independence and inflation-fighting credibility. Recent explosive data revealed core inflation accelerated to a 4 per cent annualised pace over the six months to September, from an already elevated 3.6 per cent annually. Ahead of its November meeting, the RBA board reportedly faced internal displeasure regarding public comments by Deputy Governor Andrew Hauser and Chief Economist Sarah Hunter, which significantly lifted market expectations for a rate hike. This situation highlights the delicate balance between central bank communication, market expectations, and internal governance, especially with a Treasury secretary and a majority of government appointees on the RBA board. A significant portion of the RBA board reportedly opposed the recommendation to raise rates, underscoring the ongoing policy challenges.
