Market Watch, Sept. 22
The Lowe-down on household debt and rates.
A big week in macro policy as a hawkish Fed moves to ‘normalise policy' with gradual increases to the federal funds rate. The major parts of the Fed meeting this week were the sign-off on quantitative tightening (dubbed QT). With QT, the Fed will begin to run off its balance sheet at $US10 billion a month and will not reinvest proceeds from treasuries on the balance sheet. The board is still forecasting a rate rise in December and revised its economic projection higher for growth and slightly lower for core inflation. The Fed believes that on current projections monetary policy will need to see further tightening over the coming years, as illustrated below.
The main economic data from Australia this week was the RBA minutes and Governor Philip Lowe's address to the American Chamber of Commerce in Perth.
Key points from the RBA minutes:
- Positive outlook on the economic growth of the Australian economy.
- Believes in the strength of the labour market, corporate profits, net exports and conditions.
- Expects inflation and growth to materialise in 2018 as the economic growth filters through.
- Cautioned with the levels of household debt, the sluggishness of wage growth, the level of the $A and the likely decline in commodity prices.
This is consistent with wording from the statement and the reasoning behind the ‘goldilocks' scenario in rates currently allowing the RBA to remain on hold.
The Board's position was then further explained by Lowe's address with these key take-outs:
- “The economy is on course for further progress in jobs and inflation.”
- “The Australian economy does look to be improving.”
However, it's these statements that have be interpreted as the reason the RBA is in no rush to follow other central banks in raising rates any time soon.
- “Global rates rises have no automatic implications for Australia.”
- “[A] flexible Aussie dollar allows independence on timing of rate moves.”
The suggestion is that unlike the rest of the world, Australia did not need to slash rates or undertake quantitative easing to stabilise the domestic economy during the post-GFC years. Australian rates are still one of the highest cash rates in the developed world, and despite being below the domestic neutral cash rate market forces are likely to act in the RBA's favour of creating financial stability (Aussie dollar, commodity pricing, wages growth, etc.) rather than using a blanket tool of rate movements.
Lowe's speech symbolises this point perfectly and why most believe that rate movements in 2018 will be at a minimum. Increases in the Fed funds rate will impact the wholesale funding market, meaning out-of-cycle rates rise from the private banks are likely similar to that seen in 2016, the $A remains a headwind to inflation and wage growth, and household debt will be a laggard on growth as rate increases will put household budgets under real pressure.
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