Interest rate hikes are coming - you can take that to the bank

The signs are already there that higher interest rates are going to come sooner than expected.

Both our Reserve Bank and the US Fed are clearly behind the curve.

Higher interest rates in both America and here are going to come sooner and maybe much sooner than they’ve each been predicting/promising.

In just seven-and-a-half hours through Thursday morning the world of interest rate expectations was flipped 180 degrees.

We went to bed Wednesday night with both central banks still predicting/promising not to lift their policy rates away from zero before early 2024.

That Fed ‘promise’ had already become literally unbelievable in the face of surging US inflation: the real question was how quickly and how would the Fed ‘catch up’ with reality.

We sort of got the answer at 2pm Wednesday Washington time – that’s 4am Thursday down our eastern coast – with the Fed’s latest policy decision (they come every six weeks as opposed to our RBA’s monthly timetable).

It was, more accurately, a barely disguised admission of its utter incompetence.

The Fed’s prediction/promise of keeping its policy rate unchanged at all-but zero all the way through to late-2023 at least was entirely built on its forecasts that US inflation would stay low.

In December it forecast inflation of just 1.8 per cent this year.

It upped it to 2.4 per cent in March.

Now it says inflation will be 3.4 per cent this year – a big jump on March and almost double what it predicted back in December.

That was much less a prediction and more an unstated admission that it didn’t have a clue; more pointedly, the barest minimum admission that it had to make as inflation in the first five months alone of 2021 had already increased to 2.7 per cent.

Further, the Fed wants you to believe that the inflation is ‘temporary’.

In both December and March it had predicted US inflation would be just 2 per cent or so in both 2022 and 2023.

So what’s it predicting now – after the surge in inflation that it didn’t see coming, indeed actually happening, in real time?

That inflation will go straight down from 2021’s 3 per cent to an unthreatening 2.1 per cent in 2022 and 2.2 per cent in 2023.

And not because it’s put up interest rates – on the Fed predictions, there’ll be just a total 0.5 per cent rate rise in 2023 after inflation has subsided.

But, just because….

Let that sink in: the Fed knows the inflation it didn’t see coming as it was actually happening is going to go away.

Right. Sure. Take it to the bank.

Investors and commentators talked themselves into reading the Fed as signalling a slight hawkishness.

Baloney. It did no such thing. The policy statement as opposed to the forecasts and the implementation statement was still ultra-soft.

The Fed is not going to try to catch up with the curve far less get ahead of it; it’ll try to keep the easy money party going until it blows up in its face.

That was there; here the clock ticked through to 11.30am Thursday morning and the jobless data from the ABS, with the jobless rate dropping to 5.1 per cent on both strong jobs growth and higher workforce participation.

It told us the economy was picking up pace after the end of JobKeeper much faster than the RBA and even more so Treasury had expected.

Of course, Victoria and its fourth lockdown might have marginally clipped that and who knows what a rejuvenated lockdown-fancying Chairman Dan might do to slow the national economy through the rest of the year.

But even accepting that, the RBA is going to have to hike well before 2024.

The way jobs leapt rather than shrank after JobKeeper ended was further proof of the massive rorting that had been going on. I’ll come back to that in another column.

Originally published as Interest rate hikes are coming - you can take that to the bank