Are we now up for February ‘surprises’?

WELL, that’s it. We are now done with official interest rate rises for the year. The Fed – broadly unsurprisingly, but to me also somewhat narrowly surprisingly – delivered its 50 points.

The Bank of England and the ECB were meeting overnight to do their rate rises; but while they are very relevant in their own spaces, they are essentially irrelevant in our and indeed the global contexts.

The only two that matter to us are the Fed and our own Reserve Bank.

Normally, what they did – and said – in December would frame the outlook for the year ahead.

Not so, I would suggest this year.

Partly because of how they got here, plus their selfsown inheritances from the Covid years.

This combination – and the Fed continuing to ‘go the full Volcker’ - bequeaths huge and atypical uncertainties for 2023.

Then of course, as I have to keep emphasising, there are those two huge, humungous, ‘elephants in the room’ - China and Russia.

We don’t know how and when they will be blundering about; just that they will be doing so.

Now the Fed’s 50 points was almost universally expected.

Indeed, Fed head Jerome Powell had all-but announced it a couple of weeks back.

Why I say it was somewhat, narrowly, surprising to me, was that – as I wrote yesterday – the US inflation data had opened the door for the Fed to ‘surprise’ with a 25-pointer.

Indeed, if Powell had really wanted to play Santa to the Street, he could even have paused, while still jivetalking.

There are two messages out of what he did do – with no dissents on the Committee.

That he is fully intent on over-delivering; and secondly, he wants that message to get out there plain and blunt.

This is counter to everything we have come to expect – and seen delivered – from the Fed since the mid1990s.

And which we looked like getting again through the opening months of the year when the Fed couldn’t ‘see’ the inflation bursting out all around it.

Now, it’s important to note, the Fed’s resolve has not been tested by a, say, 2000 point or 3000 point one-day drop in the Dow.

And let’s see whether this unusual combination of a tough-talking – and delivering – Fed, and a happy if not ecstatic Wall St is sustained in the opening months of 2023.

But further, and importantly on the upside, Powell has given himself considerable wriggle room to surprise on the plus side – like with the pause that he didn’t deliver this week – at the first meeting back for the year at the end of January.

That comes just before our RBA’s next meeting, a week after the December quarter inflation figures.

Governor Philip Lowe is looking at what he expects to be an 8 per cent annual inflation print – and so, a quarterly figure around 2.3 per cent – with an official rate of just 3.1 per cent.

Compare and contrast that with the US, where the annual inflation (to end November) was a markedly lower 7.1 per cent, and the quarterly inflation was just a tick under 1 per cent.

Yet the Fed’s official rate is markedly higher now at 4.25 to 4.5 per cent; and actually positive in real terms.

The RBA’s is way negative in real terms.

Let’s not forget both started the year at zero.

Lowe would be thinking – hoping – that his choice in February will be between another 25 points or a pause; which would be the first since April.

If inflation printed above 7.5 per cent it would be the 25; if it came in below and especially clearly below 7.5 per cent, the pause.

Inflation above 8 per cent – more than 2.3 per cent for the quarter – would make the choice ‘interesting’.