Powell’s power may unleash havoc or recovery

US Fed chair Jerome Powell’s decision to go fast or slowdown on rate rises has global repercussions. Picture: Drew Angerer/Getty Images

The veteran driver of the US Federal Reserve train, 69 year old Jerome Hayden ‘Jay’ Powell arguably holds more economic power than any person in recent history.

At the moment Powell is driving his train in a way that will substantially reduce US inflation and his interest rate hike plans make him a US hero among economists.

But Powell is in grave danger of pulling the ‘go fast’ lever that controls the train too hard, which will trigger a deep global recession that may even set back the western world for years.

I might be wrong, but my observations of Powell give me hope that he is too smart to cause such substantial world economic destruction.

And, as I will explain below, that hope seeped into US markets late on Tuesday New York time.

Federal interest rate moves and other catch-up action by central banks globally are causing global financial meltdowns. Picture: Michael M Santiago/Getty Images

Fascinatingly, both China and Russia concluded around 2009, after the global financial crisis, that the western world system was likely to collapse in the decades ahead.

So far they have been wrong, but Powell is driving his train far too fast and there is now an actual danger that the 2009 Russian and Chinese predictions will come to pass.

Back in the 1980s, Paul Volcker raised US interest rates but his increases were nothing like the percentage increases that Powell is applying to the US.

Other countries, including Australia, are being forced to also move quickly, which means the Powell blows to the US are impacting the whole world.

The prospect of US rates rising even further is sucking unprecedented volumes of money from all around the world into the American dollar orbit.

Most of the money sloshes around at call.

Let me explain why I am an optimist, while recognising the danger.

Powell has been driving the Federal Reserve train for four years and must already be apprehensive about the speed of the interest rate rises.

My hope is that a man of Powell’s experience will put the interests of the western world ahead of a quick and swift destruction of US inflation.

Interest rates will then not rise as fast and as far as the market believes.

And last night on Wall Street and in the gold markets, there were small signs that people were having second thoughts about Powell’s aggression.

But on the US bond market, there were no doubts that rates will keep rising irrespective of the possible global repercussions.

Demand for US dollar has soared, weakening other global currencies. Picture: AFP

Avoiding a global catastrophe is not on the bond market agenda, which underlines that there are no certainties.

What made me fully realise the global dangers being created by the current Powell train was the sudden slump in Australia’s Commonwealth Bank bonds.

A month or so back, the 4.5 year bonds were yielding around 4.9 per cent. This week sellers of the Australian dollar sold them down so they now yield 5.8 per cent.

That means that when Commonwealth Bank wants to borrow more money overseas, it will need to pay above 6 per cent.

Other Australian banks will have to pay a lot more.

Those higher borrowing costs will have to be either absorbed via lower profits or passed on to mortgage holders over and above the Reserve Bank interest rate rises.

That will have major repercussions in the property market.

Our currency is now languishing just above US64c.

If it resumes falling, you can expect that 5.8 per cent CBA Bank bond rate to go well above six per cent.

What’s happening to Australian banks can be multiplied around the world so exploding the borrowing costs of banks that require overseas capital to maintain their businesses.

Unless Powell pulls the interest rate slowdown lever expect a rash of bank and enterprise failures.

The United Sates’ greatest friend in Asia, Japan, has started to panic and is buying its currency which means it is selling US dollars.

China is doing same thing.

The collapse in sterling, plunging the UK into almost emerging country status, plus the problems of the euro have been well publicised.

While the individual countries’ situations are important, it’s the total outflow of money into US dollars that is crippling large parts of the rest of the world.

Expressed in US dollars, the Australian sharemarket is down around 20 per cent.

But Korea, China, Japan and Taiwan have fallen much further because, as the money leaves a country for US dollar, it triggers share selling.

Almost exactly the same thing is happening in commodities and horrific falls have taken place in most metals.

Of course, groups mining in Australia convert the lower US dollar returns to Australian dollars and the damage is not as great.

But such a big fall, if continued, will stop many new mine developments.

Many of the great plans to generate minerals for electrification will be put on hold if the trend continues.

But if Powell pulls the interest rate slowdown lever, watch the recovery, especially in gold.

And of course every country has an inflationary problem and the lower currencies caused by the exodus of funds into US dollars multiplies those inflationary pressures.

Meanwhile, Australian banks keep hitting small depositors with an axe with low deposit rates.

But those clients who are favoured by banks and have larger sums are receiving close to two per cent on at call deposits as the banks try to retain their deposit base.