The Australian is at it again, misleading people into believing that only one side of monetary policy works – tightening monetary policy, which is always interpreted as the movement of the overnight rate.
The markets almost unanimously expect the RBA to cut interest rates at its meeting on Tuesday, but the case for a rate cut is simply not there.
Official rates now stand at 0.75 per cent, which means the impact of any cuts is diminished and whatever firepower the central bank has left should be kept for later if consumer confidence takes another dive.
UTS Business Professor Warren Hogan is one of many economists who believe the RBA should follow the US Fed’s lead and use its statement to signal intentions rather than actually cut rates.
“Its too early to take aim,” he told The Australian.
The US Fed has a more global role which means its actions can help settle global markets.’
But the RBA on its own will do little to calm fears driven globally.
It’s not just stock markets that are reacting to the news of the spread of the Coronavirus. All facets of the financial markets, be it stocks, bonds, commodities – everything that carries a publicly listed bid and offer are pointing to a material slowdown.
The 10year government US bond closed Friday at a yield of 1.13%. On 13th January this year, the closing price was 1.85% yield. That’s almost a 40% drop in yield in just over a month. More importantly, the spread between corporate and government bonds has widened to alarming levels with stress indications in the junk bond market. Issuance of corporate bonds has collapsed over the Corona period.
What’s all this mean?
It means markets are predicting a slowdown in economic activity around the world. In other words, markets are strongly implying a recession.
Unless I’m mistaken, fed funds futures for January 2023 are down to about 0.7%, far lower than 10 days ago. Two things are very clear:
(This piece was written sometime last week. Fed Futures for Janaury 2023 actually closed at .62% on Friday, lower than Sumner found it).
- Increased probability of a major supply shock this year (not in 2023.)
- Increased probability that monetary policymakers will not be aggressive enough to prevent a recession, and if the recession occurs then demand will still be rather sluggish in January 2023 because the Fed will be too hawkish in the recovery.
This means that while the stock and bond market’s bearishness about 2020 might be for exactly the “people won’t shop” reasons that are often cited in the media, the increased bearishness about conditions in 2023 are almost certainly due to a loss of confidence in monetary policy.
In other words, we need adequate NGDP in 2023, and if we don’t get it then it will be the Fed’s fault.
This is exactly right, and this is what ought to spook the hell out of people. Futures markets for Fed funds is predicting a loss in confidence that the Fed will act to avoid a recession and this slowdown will be with us in 2023. There’s no other way to interpret this and this is why we should be worried.
If the Fed remains docile, the odds will lift there will be a new occupant in the White House come January 2021.
People should remember this. If the natural interest rate appears to be falling and the Fed does or says nothin, then the inflation mandate target will not be achieved and the possibility of recession increases. The Fed does not run monetary policy to cater to retirees who have bank deposits. That’s not the Fed’s mandate.
Fed, RBA, BOJ, ECB and the BOE need to cut now and signal they will do what is needed to stem the risk of a recession due to a potentially significant supply side shock. They also need to signal they will do what is required to maintain a steady course.