Hive Exclusives Economic Growth | Monetary Policy & Inflation | Rates
Is the RBA Setting a Precedent for the Fed?
By Jon Turek
(2 min read)
Summary
- The recent RBA meeting may have set the template for how DM central banks will manage monetary policy at zero policy rates.
- The critical element is to de-link the growth outlook from the policy outlook.
- The Fed could use the RBA template to adjust how it communicates to the market.
Market Implications
- This supports steeper rates curves.
The Reserve Bank of Australia’s (RBA) statement last week has received insufficient attention. Of course, the headlines will cover the decision to extend the bond purchase program and the dovishness of more QE. However, the RBA statement’s real message has wide-ranging ramifications for DM central banks entering this economic recovery. At this point, the RBA is offering a model for how to execute this new version of monetary policy at the effective lower bound (ELB).
While the QE extension is big, the RBA’s sequencing of policy and forward guidance is the message. At the ELB, central banks want to cut off the mechanism by which good growth outcomes lead to a tightening of financial conditions, which can undo some of their policy progress. So, it becomes very important to de-link the growth outlook and the policy outlook. The RBA seems very advanced on this front.
Fed rhetoric had struggled with this at the beginning of the year. We saw as much with regional bank presidents discussing how the growth outlook is promising and could beat the central bank’s modal forecasts. However, what the RBA has avoided, that people like Bostic/Kaplan have not, is implying that there is no link between the improved outlook and policy. Consider the RBA statements on:
The growth outlook:
- ‘There are better prospects for a sustained recovery than there were a few months ago.’
- ‘In Australia, the economic recovery is well under way and has been stronger than was earlier expected.’
The policy outlook:
- ‘The Board remains committed to maintaining highly supportive monetary conditions until its goals are achieved.’
- ‘The Board does not expect these conditions to be met until 2024 at the earliest.’ (This was a change from, ‘the board does not expect to increase the cash rate for at least three years.’)
The big takeaway from the RBA was that central banks will become ever more ‘Odyssean’ as the recovery unfolds. The reason is that autopilot fails to work, and central banks will have to be pro-active in terms of adjusting their guidance with the pace of the recovery. The Fed is learning that lesson now. The RBA had an outcome-based forward guidance with a YCC commitment mechanism, and they went on to do more. There is a big message in that, and it is something more central banks, including the Fed, will likely consider.
Jon Turek is author of the Cheap Convexity blog and CEO of JST Advisors.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)