WOULD a plunge or even just an extended slide in the Melbourne and Sydney property markets cause the Reserve Bank of Australia to hold off raising interest rates and maybe even switch to cutting them?
Similarly, on the other side of the Pacific, would a plunge on Wall St cause the Fed — the Federal Reserve, the US version of our RBA — to stop raising its interest rate; and also, maybe, even think of cutting?
And what would a real and extended trade war between the US and China — not only the two biggest economies in the world, but the two most important directly to us — do to both the underlying markets and the rate decisions?
During the week both our RBA and the Fed left their rates unchanged as almost universally — indeed, you could drop the qualifier — predicted and expected.
The RBA did it at its regular and idiosyncratically timed Melbourne Cup Day meeting — formally announcing the “non-decision” just 30 minutes before they were off, if anyone outside dealing rooms and media offices noticed.
To digress, this was in contrast to what had become an almost regular pattern in the early decade of the century, when Cup Day was almost the favourite day for the staid bankers in Sydney to throw a bit of a curve-ball into Melbourne festivities and to steal some of the thunder by announcing a rate rise at that pre-race 30-minute mark.
Across the Pacific, two days later the Fed followed suit.
But it, of course, got to an “unchanged November rate decision” by a very different route to the RBA. This is critical to understanding what will drive them.
The Fed got there by having previously slowly but steadily raised its rate eight times over the past three years, since it started back in December 2015. It started, of course, from zero, so it’s now at 2-2.25 per cent.
It has a range whereas our RBA has a specific rate.
In contrast, the RBA “started” — to leave it unchanged — all the way back at the last meeting of the previous governor Glenn Stevens in September 2016.
Against, in contrast to the Fed, the RBA “started” at a rate of 1.5 per cent (after Stevens had cut it the previous month at his secondlast meeting).
The two big consequential differences are that the Fed rate rises have run parallel with a booming Wall St. The Dow has leapt more than 50 per cent over that period — despite rate rises that are supposed to be negative for the market — with most of it coming after the election of President Donald Trump.
Not only have our steady rates done virtually nothing for our stock market — it’s up barely 10 per cent over the two years and that’s really just being dragged up by Wall St — but it’s also run parallel with a falling property market.
Again, historically property booms are usually ended by rising rates — and sometimes, like in 1990, by dramatically rising rates.
Now the Fed in its statement explicitly committed to further rate rises. Absent some GFC-like shock — and I suggest it really would have to be big — the next one will come at its next meeting just before Christmas.
There are more planned for next year, with the Fed intending to head to at least 3 per cent.
Now, our RBA has consistently been more circumspect. It has never formally committed to a rate rise — even a “future” rate rise — in any of its rate statements, or its more detailed policy analysis; although governor Philip Lowe has said several times he expected the next change would be up. Importantly. When it came.
With that background, the short answer to the two questions is that neither Fed head Jerome Powell nor the RBA’s Lowe will blink.
The Fed won’t stop hiking just because Wall St throws a tantrum. His two predecessors did. If they looked like moving — and remember that was mostly just off zero — Wall St would go down 600 or so points and they would rush to say their hands weren’t anywhere near the rate lever.
It’s partly that belief that they can bully the Fed, married to a bull-market mentality that higher rates don’t even matter, that the “Wall St masters of the universe” have kept driving share prices higher; with this past week recovering almost all of October’s plunge, albeit with a little bit of a drop overnight on Friday.
Jerome is only going to “blink” if he got a real GFClike event or if the booming US economy started to hit the wall. So what happens with China is important.
Back here, the RBA is not going to hold off hiking just because the two-city property market goes south. But that does not mean it’s primed to hike. No, it will all depend on what happens in the broader economy and that includes property and construction. And what comes flowing our way from across the Pacific and down from the north.