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18 Mar 2022 - Hedge Clippings |18 March 2022



Hedge Clippings | Friday, 18 March 2022

Overnight the US Federal Reserve finally bit the bullet and raised interest rates off rock bottom by 0.25% in what is almost certain to be the first step in many back to a normal monetary policy - assuming there is such a level as normal. The move was widely anticipated and in a classic case of "buy the rumour, sell the fact" - or in this case "sell the rumour, buy the fact," - both the Dow Jones and S&P500 jumped 1.23%, Nasdaq did a tad better, rising 1.33%, while the S&P500 VIX fell by 3.75%.

Jerome Powell declared the US economy was "very strong and well positioned to handle tighter monetary policy" - presumably they wouldn't have moved had that not been the case - and that he was "acutely aware of the need to return the economy to price stability" - which we assume to be central banker speak for "inflation is at a 40 year high, and we can't afford to sit on the fence any longer."

So the market's next guessing game is how many further rate rises are in the pipeline, and how soon is the next one?  And at what point will multiple rate rises rein in inflation (that's three "in"s in a row) before damaging the economy, or as mooted in some quarters, triggering a US recession?

Back home in Australia the economy is going "gangbusters" (a term that's not generally central banker speak, but you get the gist, and anyway Hedge Clippings is not, and was never destined to be a central banker). The jobless rate has touched 4% for a 14 year low, in part we suspect as a result of low migration, and fewer or no backpackers to speak of for the past two years of Covid induced isolation.

With the US Fed now having moved, that makes it easier for the RBA to follow suit, possibly earlier than the current expectations of their July board meeting. In between time, there's the issue of a Federal Election, which, if it is to be a "normal" one (both House of Representatives and half the Senate), looks like being on the 21st of May at the latest. Although the RBA will probably deny it, they'll probably want to avoid being accused of mixing monetary policy and politics, and with the budget due just 10 days away on 29th March, and April chock-a-block full of a combination of school holidays, Easter and Anzac Day delaying the election, June would appear to be the earliest date for the RBA to move.

There's no doubt inflation in Australia is rampant, but as there are so many ways of measuring it, exactly by how much is unclear - added to which the effects of floods, petrol prices, and supply chain issues further cloud the picture. What is clear is that the RBA is going to move for the first time within 3 or 4 months, and once again the real questions will be how many times, how fast, and how far will they go?

Having hit a record low of 0.10% in November 2020 - a level unthought of when they hit 17.5% in early 1990 under Bob Hawke and then Treasurer Paul Keating - it is equally unthinkable official rates will make it back to even close to double figures, or even half that. However, in relative terms, even 1.5 or 2% - so assume 6 or 8 moves of 0.25% - would seem to be sufficient, still leaving the rate at or less than half the average level (3.93%) of the past 32 years.  

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