2 weeks Ago By Shane Wright
The US Federal Reserve went “bang” with its first interest rate cut this decade, creating another headache for the Reserve Bank of Australia. Fed chairman Jerome Powell declared the half a percentage point cut in the bank’s key lending rate a “good strong start” that gave it options in coming months. Federal Reserve chairman Jerome Powell says the US economy is in a good position but the jobs market may be turning.
Credit: Bloomberg “We can go quicker if that’s appropriate, we can go slower if that’s appropriate, we can pause if that’s appropriate,” he said. Whether the Fed goes quicker will largely come down to the American jobs market, which was starting to show signs of struggling under the bank’s previous 5.25-5.
5 per cent key lending rate. And that’s where the lesson is most important for the Reserve Bank. Central banking is built on a series of trade-offs.
The Fed pushed its key lending rate from zero to between 5.25 and 5.5 per cent from March 2022 to the middle of 2023.
Compared to the RBA – which took the cash rate here from 0.1 per cent to 4.35 per cent between May 2022 and November last year – the US went earlier and harder.
The Fed put a premium on bringing inflation down over unemployment, which has climbed half a percentage point since the start of this year. But recent revisions to American jobs data showed there were more than 800,000 fewer jobs than the Fed and other policymakers had been initially told. That disappearance of so many jobs, on top of a marked slowdown in job creation over recent months, was one of the factors behind the Fed’s half a percentage point rate cut to between 4.
75 and 5 per cent . In Australia, both RBA governor Michele Bullock and her predecessor, Philip Lowe, have made clear the bank is willing to accept slightly higher inflation for more people with a pay cheque. The Fed is unusual among central banks at present as it is cutting from a position of relative economic strength.
As Powell noted, growth is “solid” at around 2 per cent and inflation has come down rapidly. Reserve Bank governor Michele Bullock may have to change her rhetoric about the state of the economy. Credit: Louie Douvos But other countries that took their lending rates higher than Australia, and moved earlier, haven’t had quite the same outcome as America.
New Zealand and Canada, by contrast, are in recession. The Kiwi economy has been contracting for the past 12 months, while in the great white north, the unemployment rate is now at 6.6 per cent.
The Bank of England, which meets on Thursday, has relatively low unemployment, but the economy has in effect flatlined since the start of last year. And while the US is doing better than just about everyone, the issue around the jobs market is one reason equity markets did not rejoice at the Fed’s rate cut. Apart from the slowdown in job creation, the proportion of Americans in a job is still lower than it was before the pandemic.
A similar situation is playing out in Britain (where there has also been a spike in people reporting illness). In Australia, there is a record proportion of people in a job , about 1.4 percentage points higher than before COVID-19.
But the number of job ads is falling, suggesting it will get tougher to find work in the coming months. All of these different factors mean the Reserve Bank has some tough decisions ahead. Despite the tough-talking by Bullock about rates staying higher for longer, financial markets – and an increasing number of economists – are calling her bluff.
Markets reckon the bank will use its pre-Christmas meeting to cut the cash rate. They believe it will be under 4 per cent by the federal election, which is due by May next year. The bank board meets next week and no one believes a rate cut is on the agenda.
But come Wednesday, when the volatile monthly inflation report is released, the story will probably change again. Economists at Westpac and Commonwealth Bank expect annual inflation through August to fall to 2.7 per cent while some others reckon it could be even lower.
Bullock would face an uphill battle to argue interest rates need to stay elevated even as inflation is falling while central banks around the world are cutting rates to protect their economies from abrupt slowdowns or worse. The Reserve Bank may have to change its tune – and soon. Cut through the noise of federal politics with news, views and expert analysis.
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