McCrann: Reserve Bank, Federal Reserve weigh up rates move

Central banks in the US and Australia have a fair bit to think about over Easter as they contemplate the question on everyone’s minds - will the rate cuts come?

Federal Reserve chair Jerome Powell. Picture: Chip Somodevilla/Getty Images/AFP

We go to the Easter break with two fundamentally important, challenging and confusing contradictions - but which will be resolved at some point, with possible, indeed probable, pain.

The first is - only - in America. Wall St refuses to be cowed by the prospect that the Fed might actually not deliver those promised, and indeed promised multiple rate cuts.

Now, it’s not entirely classic Wall St “rose-coloured glasses Greed” with a capital-G. C’mon man, as the Prez would say, the Fed will always deliver our multi (these days, now double-digit) million-dollar bonuses.

The prospect of AI changing everything - including, specifically, the potential for the US to embark on unprecedented China-like, quite spectacular low-inflation economic growth - is very real.

Almost out of nowhere, AI has erupted to offer a very different post-Covid future than the one that had seemed to be looming so sombrely.

But AI can only go so far in boosting corporate profits and so share values. For starters, ask Boeing.

There’s still also the basic realities of inflation and interest rates. And what Wall St has closed its collective mind to.

This is that despite Fed head Jerome Powell leading his FOMC rate-setting colleagues to unanimously pivot to promising rate cuts; he and they might just have to re-pivot to not delivering them.

Worse, there remains a possibility that he might have to re-pivot the full-180 to re-talking rate hikes; and, even, perish the thought, actually deliver a hike.

Indeed, given inflation stickiness, despite AI, he might have contemplate slowing the US economy towards and even into recession.

Hmm. I wonder what the Dow would be if we saw even just the current Fed funds rate stay unchanged into 2025 and corporate profits actually fell?

The second is what might be termed our “Down Under dilemma”.

Simply, has the economy slowed - indeed, even in the process of “hitting the wall”?

So that inflation will fall, at least as fast as the Reserve Bank has predicted (hopes)?

So the next rate move will be a cut; and it could come faster than the economentariat is now expecting?

That’s to say as contrasted with what it had been expecting just a few months ago? Remember that (admittedly, fairly lonely) predicted February rate cut?

Or is inflation going to stick above 3 per cent, if not indeed closer to 4 per cent?

And be helped by a combination of spreading 4 per cent (or even 4 per cent-plus) wage rises, and an all-of-government anti-productivity agenda, spearheaded by the two ‘Bs’, Bowen and Burke?

In that scenario, you can forget about RBA rate cuts.

You could forget about them, even in the context of households in significant financial stress.

Even Taylor Swift could only do so much to boost consumer spending.

The data from the ABS Thursday showed growth in retail sales - about two-thirds of all consumer spending - was just 0.3 per cent in February.

Across the year it plunged around 5 per cent in real, per capita terms.

That screams recession.

But the 100k-plus leap in jobs in the same month screams inflation.

Enjoy your Easter-cogitating Michele.

Originally published as McCrann: Reserve Bank, Federal Reserve weigh up rates move