RBA, Fed searching for “wiggle room”

Yasmine Raso

Senior Journalist, Financial Newswire

13 March 2023

Ongoing interest rate hikes from both the Reserve Bank of Australia (RBA) and US Federal Reserve (Fed) have signalled a search for more flexibility, according to commentary from GSFM.

Stephen Miller from GSFM said while the RBA is looking to further tighten monetary conditions, the central bank is still monitoring price and labour market conditions before it makes any decisions on future increases.

“My view remains that the policy rate will need a “4 handle” to adequately tackle inflation. Nevertheless, the Governor’s approach is sensible and gives him the requisite flexibility to go to a “4 handle” if that is deemed necessary, but also should the labour market weaken substantially more than currently expected, or the price and wage data show a more substantial deceleration than currently expected, more modest rises or a “pause” might be contemplated.

“That flexibility – or “wiggle room” – reflects some modestly softer labour market data as well as modestly softer official wage data and indications from the monthly consumer price index (CPI) that inflation pressures may have peaked.”

A similar idea could be said for the Fed but amidst very diverse conditions from Australia, with the central bank possibly prematurely raising the rate by “only” 25 basis points in the hopes that its cyclical peak was near.

“The question of whether the Fed decides on a 25bp or 50bp increment at the FOMC meeting that concludes on 22 March remains an open question,” Miller said.

“Indeed that was evident in Chair Powell’s overnight testimony where he noted that in relation to the size of the policy increment to follow the upcoming Fed FOMC meeting on 21 – 22 March that ‘…I stress that no decision has been made on this…’.

“However – and clearly contingent on the data – I suspect US interest rate markets appear to have adequately reflected the Fed’s hawkishness and I suspect that expectations of the peak policy rate are not that different between markets and the Fed.

“I suspect also that markets have in the main reflected the “higher for longer” mantra from the Fed. On that basis I think the capacity for upside surprise for US interest markets is less than it is for Australia.”