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Printed: 29 May 2024 6:20 AM


19 Apr 2024 - Hedge Clippings | 19 April 2024



Hedge Clippings | 19 April 2024

US Fed Chair Jerome Powell has been walking back - or talking back - expectations for an imminent rate cut in the US for some time now. At the end of last year, market expectations were for the Fed to cut up to six times this year. Following the Fed's March meeting Powell told a Senate committee hearing that they (cuts) were "not far" which resulted in the market expectations being reduced to three. At the beginning of this month, Powell was saying cuts were still likely, but only "at some point". This week he's saying rates can stay at current level "for as long as needed" if higher inflation persists.

And it seems it is.

Based on the latest US figures, the economy is running well, and as a result annual inflation to March came in at 3.5%, up from 3.2% a month earlier. There's even talk that the next move from the Fed may be up, which would require a major change of view from Powell from just three months ago.

Our view has long been that following the spike in inflation post Covid, and then the seemingly quick reversal, the final one to two percent reduction to a hard target of 2% was always going to be difficult, unless of course there was a recession or hard landing. Currently, that hard landing scenario seems unlikely both in the US and locally. Even though March unemployment rose slightly in Australia to 3.8%, it is still a long way from the level Michele Bullock indicated it would need to be to cause an issue.

Still at home, Australia's CPI numbers are due next Wednesday and will be crucial to the RBA's thinking. February's seasonally adjusted CPI number year-on-year was 3.7%, up from 3.5% in December, and just as it is in the US, that's heading in the wrong direction. There's a real risk that consumers get used to inflation between 3-4%, possibly just thankful it's half the level it was a year  ago. With wage rises well above that in many sectors, along with government largess and generosity, and Stage lll tax cuts just around the corner, the RBA's fear of entrenched inflation of 3-4% is all too real.

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