A tale of two central banks. The Reserve Bank of Australia and the US Federal Reserve are both exhibiting a clear sense of not being convinced about what is happening in the respective economies that oversee.

The RBA isn’t convinced the economy is doing as poorly as statistics (building approvals and retail sales) show, while the Fed remains not quite a believer about the strength of the US economy’s third attempt to rebound in as many years.

Like the RBA, the Fed is hedging its bets about the economy, but in doing so, has clearly sent a message that further help from the central bank via another easing, is off the agenda, unless the economy slows.

In Australia, we almost got a rate cut yesterday, but central banker caution won out in the end and we have to wait until May for some inflation data (as suggested in Crikey on Monday) before thinking about rates again. The closeness of yesterday’s meeting on the question of a rate cut seems to have escaped much of the chatter this morning.

The minutes of last month’s Open Markets Committee of the US Federal Reserve, released overnight, squelched the solid start to April for markets as the central bank’s key policy-making board suggested that the US economy was on its own and the chances of another bout of “happy juice” in the same of another bout of quantitative easing was over. Just two of the 10 voting members supported a new round of easing.

Fed chairman Ben Bernanke seems to be moving from a position of scepticism about the economy to cautious acceptance that this time the rebound is happening, although a “poor” jobs figure for March on Thursday night our time, might change that view. Certainly Goldman Sachs thinks there will be about 175,000 job created, which is considered to be “poor” given that the median forecast is just over 200,000 and the same number were created in the previous four months.

Goldman Sachs (one of the major users of the previous two easings and the cheap money it has created) believes the Fed will be a third easing. It made this forecast before the Fed minutes were released.

The Fed suggested that in the absence of a slowdown in the rebound gathering pace in the US (which can’t be ruled out, mind you, given what happened in 2010 and 2011). According to the minutes, only two voting members suggested that more easing could become necessary if the economy lost momentum. At the previous policy meeting in January, a “few” Fed members thought the central bank could start adding more long-term securities before long and “a number of participants” indicated they were open to the idea if the economic outlook deteriorated.

There was apparently no discussion at the meeting of any new form of quantitative easing.

In Australia yesterday, the RBA board meeting was a close-run thing: a rate cut almost happened, judging by the significant change to the wording of the key part of the post-meeting statement from governor Glenn Stevens.

The board decided after a lot of discussion to wait until the March quarter producer and consumer price inflation data is released later this month (around April 23-24). So a rate cut will come at the May 1 meeting, so long as the CPI and other measures show inflation is contained (ahead of the boost later in the year from the carbon tax, estimated to be 0.7%).

Reading the statement from Stevens, it’s clear that the innate caution of central bankers prevented a rate cut. The key last paragraph of yesterday’s statement read:

“The board eased monetary policy late in 2011. Since then, its judgement has been that, with growth expected to be close to trend, inflation close to target and lending rates close to average, the setting of monetary policy was appropriate. The board’s view was also that, were demand conditions to weaken materially, the inflation outlook would provide scope for easier monetary policy. At today’s meeting, the board judged the pace of output growth to be somewhat lower than earlier estimated, but also thought it prudent to see forthcoming key data on prices to reassess its outlook for inflation, before considering a further step to ease monetary policy.”

Contrast with the last paragraph of the March statement, which read:

“With growth expected to be close to trend and inflation close to target, the board judged that the setting of monetary policy remained appropriate for the moment. Should demand conditions weaken materially; the inflation outlook would provide scope for easier monetary policy. The board will continue to monitor information on economic and financial conditions and adjust the cash rate as necessary to foster sustainable growth and low inflation.”

The key words from the last paragraph of yesterday’s statement are: “At today’s meeting, the board judged the pace of output growth to be somewhat lower than earlier estimated.”That means the RBA has now convinced itself that the economy has slowed even further than it appeared in March, even taking into account the continuing boom in resource investment. In March Stevens was talking conditionally when he said “Should demand conditions weaken materially, the inflation outlook would provide scope for an easier monetary policy.”

In April, the RBA now believes that “output growth” is “somewhat lower than earlier estimated”. And despite the confidence in March that the inflation outlook would allow an “easier monetary policy”, the bank wants to wait a month to make sure. In that time there will be other data for February (trade, car sales, housing finance, lending data, confidence and business conditions surveys) that will flesh out the RBA’s feelings about the economy.

The use of the word “prudent” in the final sentence of yesterday indicates the extent of the bank’s reservations. Stevens could have recommended a cut to the cash rate, but clearly didn’t provide a clear-cut recommendation and left it to the board to thrash out. It took its lead from the continuing caution about the economy’s real state of health among the senior officials of the bank.

It could have cut rates, but there’s that question whether that would have been a prudent move at this time. Back in the GFC the RBA observed on a couple of occasions that it was “prudent” to cut rates, while when rates were being lifted, it made the same comment about the timing of increases.

The word is used to send different signals to the market, according to the health of the economy. Think of the use of the word as like a weather forecast. When it’s clear that bad weather for the economy is coming, a rate cut is “prudent”, when clearer, sunny skies are ahead, a rate rise becomes “prudent” When the picture is clouded and confused, as it is now, it is “prudent” for the bank to wait a little longer to see if conditions become clearer. The danger in all cases is that waiting too long can become imprudent.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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