The central banking conspiracy looks like
pulling off one of its great jaw-boning stings – convincing the markets and
consumers that they’re going to keep cranking up interest rates to stop inflation,
so that they won’t have to keep cranking up interest rates to stop inflation.

Another Fed member was at it last night,
promising the monetary thumb screws and Catherine wheels and therefore scaring
financial markets and helping to lower commodity prices.

But while Atlanta Fed President Jack Guynn was saying core
inflation has moved to or beyond the range he considers acceptable, a US
housing industry survey was showing sentiment had crashed to its lowest level
in 11 years,
presaging the sort of negative influence that no central bank can ignore while
contemplating a rate rise.

It’s a
line Macquarie Bank economist Mark Tierney is stressing in his morning report to clients.
There is too much danger at present of the US housing industry
tipping into a 1994-style recession for the Fed to push rates much further. “Without a doubt, the
most important constraint is the housing market. The UK and Australian
experiences show how quickly a housing slowdown can broaden to the rest of the
economy, “ he writes, tipping the Fed is very close to the peak of its
tightening run.

Meanwhile China’s
central bank is following up last week’s move to reduce banking system
liquidity by talking tough about striving to stop excessive availability of credit and money.

It’s the sort of thing that cools commodity
speculators’ passions and lowers prices –
making the real commodities boom more sustainable. It’s actually good
news for the Australian economy and stock market, but don’t expect the frothy
end of the game to realise that for a while.

And speaking of the Australian economy, the
is taking “the glass half empty” approach to a survey of local economists about
the likelihood of another rate rise here this year.

“Most economists
now say the Reserve Bank will raise interest rates before the end of the year,”
reports the first paragraph – but “most” turns out to be just 13 out of 24 –
the thinnest possible majority.

It would be
fairer to say economists are pretty evenly split about the possibility of
another rise before Christmas – an indication of what a good job the jaw-boners
are doing.

Peter Fray

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Peter Fray
Editor-in-chief of Crikey