If the US Fed has the balls to hike rates in the middle of a financial crisis, what’s stopping Australia?
So the US Fed has just painted the RBA into a corner.
After all the chaos in the US financial markets in recent weeks (which I’ve written about a few times), there were a few people who though that the RBA might hold off on the rate hikes at their next meeting on April 4.
And truth be told, bond markets are now pricing in a hold at the next meeting. But bond markets are funny because very few economists expect the RBA not to hike another 25bps.
Why?
Well, because both the US Fed and the European Central bank have both hiked rates in recent weeks.
They looked through the ructions in the financial system, and went, ‘yeah, nah, we’re still hiking.’
They might be kidding themselves of course.
At his press-conference, Fed Chair Jerome Powell was asked if he still thought he could nail a soft landing (bringing inflation back under control without driving the US economy into recession.)
“I think that pathway still exists and you know, we’re certainly trying to find it.”
Keep searching my prince. Cinderella’s out there somewhere.
And equity markets still seem to agree. They don’t seem to be priced for recession at all.
Bond markets on the other hand aren’t having a bar of it.
If fact, they reckon that in the second half of this year, the Fed will be forced to CUT rates. Not once, not twice, but three times! In just six months!
So there’s a weird disconnect there. Both scenarios can’t be right.
But back to the RBA.
Markets thought the RBA might respond to the financial chaos by pausing rate hikes, particularly since it all followed a string of data reporting to the soft side.
But what message would it send to the world if the ECB hiked, the Fed hiked, and then the RBA went, “we’ll hold”?
The only thing that’s changed since another rate hike was a sure bet was the implosion of a number of banks.
So it would be taken as a massive vote of no-confidence in the Australian banking sector, since the only reason not to hike would be to protect the banks.
And if the US banks can handle 25 bps, surely Aussie banks can right?
So if the RBA holds, and given that they have inside insight into the banks through APRA, everyone would worry if something was up with Aussie banks.
Bank funding would collapse, bank share prices would tank, and the Australian financial system would be taken to the brink.
So the RBA just doesn’t have a choice. It’s been painted into a corner.
So you can bank on one more rate hike in April.
But after that, we’re certainly done, for my money.
JG.