Daily Commentary BY THE CURVE TEAM –

More Monetary Policy Easing Coming

12th of July, 2019

Mounting risks to the global outlook are forcing central banks to reassess monetary policy settings with a wave of looser policy on its way over the months ahead.

Last night the US Federal Reserve gave its biggest indication yet that it will join many other central banks in easing monetary policy over the months ahead. After already suggesting cuts were on the way during the first day of his testimony, overnight Fed Chairman Powell doubled down during his second day in front of Congress.

His comments not only suggest that a rate cut is coming, but we might see more than one adjustment over the months ahead. Powell was criticising the Phillip’s curve and suggested that current rates might not be as “accommodative” as first though. Given the Fed’s desire to extend the current record expansion, we are likely to see the Fed take out ‘insurance’ against a slowdown before it is explicitly confirmed by the data.

This makes sense and something that the RBA has done many times over the past few decades. There is little risk of the US economy running too hot given the current global backdrop so a little more support isn’t going to hurt.

A move by the Fed would be in sync with what is happening in other major developed economies at present. The minutes from the ECB’s most recent meeting suggested that further easing isn’t far off either. The minutes said that the ECB “needed to be ready and prepared to ease the monetary policy stance further by adjusting all of its instruments, as appropriate.”

News overnight did little to move equity markets as they continue to levitate on the prospect of further easing. We did see sharp moves in bond markets but not in the direction would have been expected.

The prospect of further stimulus combined with a weak US bond auction and more China bashing from President Trump actually saw long bond rate surge overnight. It was one of the biggest one day moves this year. As a result we have seen much of the yield curve inversion dissipate with short rates remaining anchored to the outlook for overnight cash rates.

Movements in monetary policy at the global level are important for our own setting of monetary policy. More stimulus, if it helps boost growth, should help our own outlook. However if everyone is easing, it will reduce the impact of the RBA’s efforts when it comes to the Australia dollar.

It set the scene for an interesting few weeks ahead of the next meeting of the Fed at the end of the month closely followed by the RBA’s August Board meeting a few days later.

David Flanagan

Director - Interest Rate Markets