US Federal Reserve stupidity ensures mother of all implosions

‘The RBA will do its job if inflation locks in; it will hike and hike promptly.’ Above, the Reserve Bank of Australia building in Sydney. Picture: NCA NewsWire/Joel Carrett

The Reserve Bank and its big – but embarrassingly inept and just plain disgraceful – brother, the Fed, ostensibly based in Washington but totally hostage to lower Manhattan, have this week joined to define the investment environment, local and global, for 2022 and indeed beyond.

The first and most critically important thing to note is, however, how the environment actually unfolds and maybe comes with a rush through next year won’t necessarily be anything like what the two central banks believe is in store.

What we got this week was the end to the policy frameworks that had been operating for at least the last year and indeed, in a broader sense, since all the way back to 2008 – especially in the case of the Fed.

That part was clear-cut: what exactly they’ve been replaced with is far more opaque; and much more critically what might actually happen to ‘‘surprise’’ especially the Fed are very different matters indeed.

In the local case, since Melbourne Cup Day 2020, we’ve had an entire monetary structure built around a 0.1 per cent interest rate and the explicit promise to keep it at that 0.1 per cent until early 2024, at the earliest.

One can argue about the appropriateness of it; one can ponder its sustainability; but the one thing which is indisputable is that it delivered certainty – and the virtual free money of 2 per cent mortgage rates (and very happy real estate agents, property sellers and luxury car dealers).

That certainty has now evaporated, driven by the bond market which drove short-term yields from the 0.1 to a straight 1 per cent.

It may seem to have been replaced by a new ‘‘certainty’’ – the RBA’s forecast policy expectation, together with its ‘new’ forecasts for the economy in Friday’s Monetary Policy Statement.

It has not: the only certainty is now bubbling uncertainty.

The domestic future, the RBA’s expectation of what it will be, and its policy response – pre-emptively or more likely reactively – is complicated and uncertain enough.

But the Fed adds a whole new additional layer.

It’s not just that it is denying reality – the big thing is serious inflation, but there’s a whole lot more happening like most critically Chinese instability, maybe cataclysmic Chinese implosion.

Worse, it has now doubled down on ‘‘targeting’’ the US equity market and to an only slightly lesser extent (the two are like Siamese twins joined at the values of Manhattan condos and Long Island estates) the bond market.

It is quite simply a disgrace that the Fed sees its primary task as doing everything to keep the Dow at, to pick a number, 35,000.

It also reveals its collective stunning stupidity – and why you should be afraid, really afraid – because it doing so, in continuing to try to keep the biggest bubble in human history bubbling, it guarantees the crash when it comes will be all the more catastrophic.

First, the RBA. It’s now ‘‘caught up’’ – to some degree, perhaps – with the, simply undeniable, inflation reality.

In August it forecast 2.5 per cent headline and 1.75 per cent underlying inflation for the December year.

This would be followed by 1.75 per cent headline and underlying inflation in 2022 and both inflations edging up to only 2.25 per cent in 2023.

All that not simply explained why but all-but demanded the RBA leave its rate structure at 0.1 per cent into 2024.

Now, the RBA is forecasting 3.25 per cent headline and 2.25 per cent underlying inflation this December year.

So does that explain if not indeed demand rate hikes in 2022 or at least 2023?

No, because – echoing the Fed? – it sees this inflation as ‘‘temporary’’ or ‘‘transitory’’. Both headline and underlying are forecast to run at 2.25 per cent next year and, despite all the monetary stimulus of a 0.1 per cent policy rate, edge up only to 2.5 per cent by the end of 2023.

The core reason is that it sees wage rises, although picking up from the 2.25 to 2.5 per cent range it was forecasting in August, picking up only very marginally to a 2.5 to 2.75 per cent range, all the way through to mid-2023.

At core it does not see inflation accelerating from the low-2s unless and until wage rises are sustained at 3 per cent-plus; and it (still) does not see that happening all the way through into 2024.

So it still does not believe it will raise from 0.1 per cent until 2024 or late-2023. But whereas pre-Tuesday that was a promise, now it’s just a prediction.

In my view it is going to wrong, just as it’s been wrong about inflation through 2023.

The most telling pointer is the way we got strong inflation – 0.7 per cent, nearly 3 per cent annualised – in the September quarter despite over half the economy, NSW and Victoria, in inflation-crunching lockdown.

It is also my view, that unlike the Fed, the RBA will do its job if inflation locks in; it will hike and hike promptly.

What the RBA does will impact the property market; it is what the Fed does – or does not do – that will drive Wall St and so our share market.

The Fed is now ‘‘committed’’ to ‘‘tapering’’ its QE by $US15bn ($20bn) a month until it stops new money-printing by mid next year. And rates, at zero? We’ll get back to you.

Except it isn’t committed. If Wall St throws a tantrum, it will immediately back off.

A responsible uncorrupted central bank should be actually, aggressively, aiming to get the Dow down to around 17,000 to 20,000, to equate values with a normalised policy rate of 2-3 per cent.

So, again, we have what the Fed says it might do; we also know what it will actually do – anything to avoid any fall in the Dow.

It thereby guarantees the mother-off-all implosions. It either allows inflation to run away or – a different Fed – does what Paul Volcker did at the end of the 1970s.