Fed sits. Some US analysts claim that not since the Asian crisis in 1998 has the US Federal Reserve been as publicly worried about the global economy and markets and the influence a US rate rise might have on febrile confidence (although it has to be pointed out that much of the volatility, and, indeed, the Asian crisis itself was triggered by the shock early 1994 rate rise from the Fed, which sent markets all over the place and saw Orange Country bankrupted, along with a string of financial firms). Others say what’s remarkable is the way these suddenly new concerns about what is happening offshore have overtaken the usual domestic focus of the Fed. But whatever, early today, around 4.15am, the Fed changed market perceptions with this paragraph in its post-meeting statement:

“Recent global economic and financial developments may restrain economic activity somewhat (my emphasis and the phrase that worried markets) and are likely to put further downward pressure on inflation in the near term.” It added a little later in the statement that while the risks to the US economy remained nearly balanced it was “monitoring developments abroad.”

That leaves the Fed meetings in October and December for a rate rise, but could we have a self-fulfilling prophecy by then with rising global volatility, meaning yet another delay to the most talked-about rate rise in decades? Economists say December looms as the next best month for an increase, but some canny souls are now punting on early 2016.

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The message from the Fed has changed: it is now aware of what is going on globally and won’t be to doing anything to threaten global growth at a time when US inflation is below target. And this situation will continue until the Fed is convinced that these external factors will no longer put a lid on US inflation and the chances of it rising back to the Fed. — Glenn Dyer

Fed’s foreign fears. In fact from what Fed chair Janet Yellen said in her post-meeting media conference, if it were simply a matter of looking at the US jobs and inflation data, the headlines would have been “Fed raises rates”. Yellen made it clear in her comments that the US jobs market is close to full employment, and that the Fed remains reasonably confident that the inflation rate will drift back up to around 2% eventually (that’s despite being surprised by this year’s weakness). In fact, when asked specifically about the undershooting on inflation, Yellen said she and her colleagues aren’t too worried. Inflation will be very low this year, true, but it will accelerate next year as the labor market tightens further and the impact of a stronger dollar dissipates. So why not a rate increase then? That is also despite the pushing out of inflation reaching the Fed’s 2% target to 2018 from 2017, which confirms just how wrong the Fed has been on inflation for the past year.

But even after that, it’s clear the Fed would have lifted rates this morning, but it didn’t. So you have to look at what was new in the statement and its that look offshore and to what is happening on China in particular, and in other weakened emerging markets. So joining US jobs and inflation as factors to be weighed when this long tipped rate rise will happen, you now have to factor in the health of the Shanghai stock exchange (i.e. the Chinese economy), the price of oil, the value of the dollar, and the stability of dozens of economies, especially in emerging economies. In fact that sounds a lot like what our Reserve Bank does every month at its monetary policy meeting. It’s also why this month’s long discussion about China by the RBA board, the currency, the financial markets and the economy, should be taken as a tip about the bank’s major concern at the moment. — Glenn Dyer

Suddenly sunnier Australia? The American economy might be stronger and better placed that Australia’s is at the moment, with stronger growth, lower inflation and unemployment, but there was a world of difference between the assessments of Yellen in Washington and those of RBA governor Glenn Stevens before the House of Representatives Economics Committee in Canberra this morning. While Yellen fretted about inflation, China, other economies, unemployment and not stampeding markets, Stevens was far more relaxed, upbeat even. In fact his most interesting comment was the surprisingly optimistic assessment of the state of the Australian economy — sunny even, compared to the doom and gloom of many in the markets (Goldman Sachs especially and its one-in-three forecast of a recession) and the commentariat (especially those still pining for the clumsy Abbott-Hockey style of economic management).

“Nonetheless, what is pretty clear is that the economy is growing, albeit not as fast as we would like, the adjustment to the decline in the terms of trade is well advanced, and non-mining activity is improving rather than deteriorating. If the latter trend continues, it is credible to think that we can achieve better output growth, particularly as we reach the later phases of the decline in mining investment. This is what is needed to bring down the unemployment rate,” Stevens said in his introductory remarks.

Now that’s a level of optimism you would have been hard-pressed to find in many columns and commentaries in recent weeks. — Glenn Dyer

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Peter Fray
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