Bernanke’s Jackson Hole speech sparked a modest risk rebound on Friday as the signal was sent, yet again, that further QE is coming. I view this more as a reiteration though, rather than something new. The FOMC made it plain to all that they were going to print again after the Fed’s minutes and readers may recall the two key words I highlighted that virtually told us that QE was locked in. Sustained and substantial.
Unless the Fed saw sustained and substantial growth they were going to print, they told us, which cements QE. Because even if growth picks up, and it is, the FOMC will simply argue it isn’t sustainable. The end of year fiscal cliff theatrics still presents the best timing I think, although that is only a guess.
The broader problem is that I still don’t find chairman Bernanke’s views on the recovery at all compelling. In particular there are several glaring logical deficiencies. Take the Fed’s view on growth more broadly. They’re obviously still very disappointed with growth to date and many describe it as a weak recovery. I would ask you though, was economic growth in the years prior to the GFC characterised as weak? I’m sure that isn’t the perception now and indeed at various stages during that period, the Fed described growth as strong, solid or as having ‘a good deal of forward momentum’. The thing is growth averaged just over 2.5 per cent for that period (2004-07) – a period widely regarded as a boom.
What the Fed, and others of that view would have you accept then, is that growth rates of a similar magnitude now – which so far in this recovery has averaged 2.2 per cent or 2.6 per cent over the last few quarters – is somehow weak. When growth rates such as this weren’t weak during the boom. It doesn’t make sense does it? Indeed it’s a leap that insults the intellect.
The Fed chair also suggests that persistent calls that inflation would accelerate have been wrong. Unfortunately I think the good chairman forgets his history. The backdrop that existed when people, such as myself, made that forecast was one beset by deflationary fears and depression. The great fear was deflation and I was among a small minority, not just in Australia, but globally, who argued that this was ridiculous - as it was impossible for deflation to take hold, unless by deliberate policy design, under a fiat currency regime. Popular comparisons with the Great Depression were fraudulent given the gold standard was in place at that time.
Instead I argued that inflation would accelerate and it has. Sharply. To the extent that inflation is now either at, near or above target in the UK, EU and US. That wasn’t a prediction for hyperinflation, just that deflation was not a credible threat and inflation instead would rise. My concern, if readers remember, was and still is, that policy makers would initially ignore the very clear lift inflation – they are – and would only react belatedly, thus causing a lengthy recession when they did.
All of this has very important implications for the RBA when they meet this week (decision Tuesday 1430 AEST), or rather it should. The rate cut call is out and about again, not that anyone is expecting a cut at this meeting, and we even have people talking about another domestic recession in 2013. That would make the fifth year in a row we’ve had that call – and I’d note that it has been wrong in every single year.
The RBA board needs to realise that the global narrative that often underpins these repeated recession calls is way-off the mark. That’s why the recession call is always wrong. That’s part of the reason why the domestic economy is strengthening. Economists have repeatedly overlooked the reality that the upside and downside risks to the global economy (and so the domestic economy) are evenly balanced. That means policy, as it currently sits, is inappropriately calibrated. It’s already set for a downturn, when we know that global growth is at trend and domestic growth well above.
The RBA board needs to keep all of this in mind when they meet over the next few months. They have already cut rates into an accelerating domestic economy. For a forward looking central bank this is very unusual and bad policy. I would urge them to resist panicking again in the face of what could be a temporary decline in the terms of trade.
They need to remember the fact that the global narrative being spun has proven to be wrong. Similarly, they need to note that domestic analysts, who have repeatedly called for rate cuts, based those calls on an incorrect analysis of the domestic economy. There is no non-mining recession and the economy is not weak. It may weaken, but then rates are set for that already. Conversely, it may strengthen.
How the RBA board actually reacts I simply don’t know. Economic analysis doesn’t appear to feature heavily in the mind of some board members, who are probably more swayed by the terrible fortunes of the companies they run. We certainly can’t rule out a cut at any stage then, as their track record isn’t good.
Note that we get an update on the Australian economy in Wednesday at 1130 AEST. The forecast is that GDP grew by a strong 0.8 per cent. The risks are evenly balanced given the influence of business investment which is extremely volatile. There are a few other bits of information out which include house prices today at 1000 AEST (by RP Data-Rismark) which is then followed by TD’s inflation gauge at 1030 AEST. At 1130 AEST we get company profits, sales and inventories, which is accompanied by monthly retail sales and ANZ’s job ad series. Finally at 1630 AEST we see the RBA’s commodity price index.
On Tuesday we get the current account balance, while on Thursday the employment numbers are out. The unemployment rate is forecast to rise to 5.3 per cent, while jobs growth of 5000 is expected. The final numbers for Australia are the trade figures on Friday at 1130 AEST.