Daily Commentary BY THE CURVE TEAM –

Fed Joins RBA in Monetary Policy Stasis

11th of June, 2020

Following their latest meeting, the Federal Reserve’s forward guidance shows it is joining the RBA in Monetary Policy stasis.

Our central bank has made it repeatedly clear that the current setting of monetary policy will be with us for several years. Overnight the US Federal Reserve joined them. Following their latest meeting, the FOMC released an update dot plot which captures Fed members expectations for the cash rate. It indicated that the Fed won’t be looking to raise rates until beyond 2022.

Federal Reserve Chairman Jerome Powell hammered that point home, indicating that they aren’t even thinking about rate hikes at this point in time. They have also committed to continue Quantitative Easing at it current pace which has been pared back to $80bln a month from being almost four times that amount at the peak of the crisis. Even at that reduced amount, the pace of purchases is above that seen during QE3.

What we are actually witnessing is central banks from more developed nations finding themselves in the predicament that Japan has been in for decades.

As highlighted by RBA Governor Lowe last month, monetary policy has been the tool of choice over the past couple of decades used to navigate the business cycle. So rather that fiscal spending, and more importantly policy reform, being used to help economies come out of downturns, we have lowered interest rates. By doing this we have used debt to drive growth rather than productivity. It has meant that the more we pull forward demand with debt, the more debt is required to generate growth.

To offset this growth in debt, rate have to keep going lower. Now we find ourselves at the point where rates are at their lower bound. Unless growth can be generated without debt, lifting interest rates will be difficult, just as Japan.

David Flanagan

Director - Interest Rate Markets