TLDR: The world’s most powerful central bank looks set to ease off the brakes on the global economy in two weeks time because of fears it may be overdoing the ‘tough love’ on growth and jobs to bring inflation down. This easing back will come less than a month after our own Reserve Bank slammed down on Aotearoa’s economic brakes extra hard to engineer a recession next year.
So has our central bank, which was one of the first to start hiking last year, instead got its timing wrong at the end of the cycle? The harshness of Te Pūtea Matua’s (RBNZ) message and forecasts last week now stands in stark contrast with the more conciliatory stances being adopted in the United States, Australia, Europe and China. Over there, the main fear now is of simultaneous recessions, rather than out-of-control inflation, especially now there are repeated and deepening signs that inflation is turning down overseas.
Has the Reserve Bank just misjudged the timing of its own extra-hard-slamming-on of the brakes?
Earlier this morning, US Federal Reserve Chairman Jerome Powell gave a much-anticipated speech in which he signalled the Fed would reduce the speed of its tightening. The comments triggered a sharp rally on US stock markets as investors celebrated what appeared to be the beginning of the end of the global rate-hiking cycle.
Here’s the key section of the speech (bolding mine):
“Monetary policy affects the economy and inflation with uncertain lags, and the full effects of our rapid tightening so far are yet to be felt.
“Thus, it makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down. The time for moderating the pace of rate increases may come as soon as the December meeting.” Jerome Powell in a speech titled ‘Inflation and the Labor Market’ to the Brookings Institution in Washington.
The next Fed decision-making meeting is on December 13/14 and investors scaled back their expectations of the chances of a fifth consecutive 75 basis point hike to 23% after the speech from 33% before the speech. Investors and traders interpreted the speech as the beginning of the pivot, pushing the S&P 500 up 3.1% this morning and extending the market rally to two consecutive months of gains for the first time in over a year.
That begs the question: has the Reserve Bank just misjudged the timing of its own extra-hard-slamming-on of the brakes? Our central bank’s ‘cool your jets’ statement last week, aimed at creating a recession, has come just as Australia is already talking less hawkishly about future rate increases, the United States is about to slow its hikes and European investors also see smaller rate hikes after lower-than-expected inflation figures overnight.
The evidence of fast-slowing global economies and a fast-turning drop in inflation continued to mount up over the last 24 hours, including:
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