Federal Reserve admits it’s a hostage to Wall St

The Reserve Bank is not going to cut its official interest rate any time soon.

Treasurer Josh Frydenberg will ”have the day to himself” on Tuesday week, in both the policy and political senses. Picture: Aaron Francis

The Reserve Bank is not going to cut its official interest rate any time soon and its bigger brother in Washington, the US Fed, is not going to raise its rate somewhat longer than any time soon.

The Fed explicitly told the entire world of its intentions — and even more importantly and disturbingly, the basis for its stance. That it is totally hostage to Wall Street.

The Fed has formally “committed” not to do anything that might even limit, far less threaten, the ever-increasing accretion of wealth by the financial elites on a scale that makes those infamous characters from the “greed is good” decade of the 1980s look like rank amateurs.

Simplified, but not inaccurately so, Fed head Jerome Powell has in effect defined his and the Fed’s mandate as doing their damnedest to get yet more people to join Microsoft’s Bill Gates and Amazon’s Jeff Bezos in the $US100 billion ($140bn) net worth club.

Indeed, to make the attainment of even paper billionaireship of such commonality that it would be of little note other than to second-tier realtors selling sub-$50 million apartments lacking Central Park, Hudson or East River views.

Back home, the RBA’s intentions were “announced” very differently, by the Australian Bureau of Statistics via its February employment release, and will be confirmed by the RBA more formally on Tuesday week after its March meeting.

That means, by the by, that Treasurer Josh Frydenberg will “have the day to himself”, in both the policy and political senses.

I’m not sure that’s going to be worth all that much, but at least he won’t have the RBA — and market reactions to the RBA’s 2.30pm statement — stealing oxygen from and more probably seriously undermining what he sets about announcing five hours later.

There were three possibilities in Thursday’s employment data, and therefore three possible RBA responses:

● Essentially positive jobs data: either or both no actual fall in employment or a rise in the jobless rate.

● Mildly negative data: either or both a modest fall in employment and a small kick-up in the jobless rate.

● Or, the least likely, a serious, shock, deterioration, that would have put a big question mark over the ABS’s previous buoyant jobs data.

Taking them in reverse, the RBA’s response would have been to move on Tuesday week to an immediate cut in its official rate, changing its rhetoric towards the possibility of a future cut, maintaining its now more rigorous neutrality.

Well, we got essentially positive data — a small rise in total jobs and a tick-down in the jobless rate to 4.9 per cent.

The RBA’s “puzzlement” over the good employment data — and it’s not just the dodgy survey ones, but other more reliable and more leading or concurrent indicator jobs indicators — versus the soft GDP (output) data will continue.

So also will its neutral policy stance. The Treasurer will have Tuesday week to himself. He will most assuredly hope that using a budget to kick off a federal campaign proves somewhat more successful than it did in 2016.

Last Thursday — what was said in Washington and implied out of Canberra — proved a momentous day: it has essentially set the parameters for the global investment environment for at least the next few months.

The local one — sorry, Josh, and your best efforts on Tuesday week — will be “modified” in May by the arrival of Bill Shorten and Chris Bowen into government and Richard Di Natale into de facto coalition.

In the iconic imagery of the Fed’s supposed primary responsibility to “snatch away the punchbowl”, Powell has all-but promised that, heck, he’ll kept pouring in 100-proof monetary hooch if the partygoers show any signs of going home.

He’s promised not to raise the Fed’s policy rate for at least the rest of the year and perhaps even more portentously moved to suspend the Fed’s unwinding of its multi-trillion QE or quantitative easing.

That opens the door to the Fed switching to both cutting its policy rate and restarting QE if and when Wall St — and The Donald — demands and indeed, it would appear, commands.

Powell first displayed his colours — primary yellow — when Wall Street dropped 20 per cent in the closing months of last year, when he went out of his way to walk back any suggestion that the Fed would stick to its policy normalisation.

With Wall Street now almost back to its all-time high, Powell is getting in ahead of any wobble, announcing his own pre-buckle. As best as he can do, he’s promised to deliver a continued global easy money environment.

He can’t single-handedly bring Chinese money back into global property; but he can underwrite Wall St and through Wall St global financial markets — equities in particular, bonds as well — and limit the risk of a US dollar appreciation.

His counterpart down here, Philip Lowe, will continue to promise a somewhat different policy stability. It can be summed up as I have written previously, as his disinclination to join the economentariat in rushing to the side of the boat labelled “rate cut”.

Just as he declined in his first two years to join them all on the other side labelled “rate hike”, preferring to stay where I would wish him to continue to stay: in the middle, steering the ship.

This does not mean necessarily a commitment long-term to rate neutrality. Unlike the Fed, and as far too many domestic “observers” fail to understand, our RBA will actively assess both the economic and financial environment continuously in real time and act immediately if it sees fit.

As indeed it would have done Tuesday week if it had come to that conclusion.

Importantly, that now includes a continuous assessment of the consequences of the Powell Wall Street two-step buckle and of course the consequences of Shorten-Bowen, making no judgment on the policies themselves.