Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 412

A tale of the inflation genie, the Fed and the RBA

Inflation is the topic du jour in global financial markets.

The parameters of the debate appear to be focussed on the likelihood of some persistent inflation, and potential financial stability concerns, in the absence of a timely withdrawal of the historically high levels of monetary accommodation currently being applied by central banks.

In the US the most recent May inflation report showed annual ‘core’ inflation at its highest level since 1992. In the past three months US inflation was running at an annual rate of 8.3%, the highest since 1982.

Plenty of inflation evidence

Moreover, the inflation pulse continues to beat rapidly. Purchasing managers report suppliers struggling to meet demand. Order backlogs are at their highest in 40 years, and commodity prices are surging.

In Warren Buffet's annual address to Berkshire Hathaway investors, he stated that he was seeing “very substantial inflation”.

Obama-era Treasury Secretary Larry Summers, former Pimco Head and Allianz adviser Mohamed El-Erian and BlackRock CEO Larry Fink, have all expressed concerns regarding inflation as well as some of the latent financial stability dangers.

They cite inflationary pressures mounting from:

  1. The boost in demand created by the $US2 trillion-plus in savings that Americans have accumulated during the pandemic
  2. Historically high levels of monetary accommodation including large-scale US Federal Reserve debt purchases and Fed forecasts of essentially zero interest rates into 2024
  3. $US3 trillion in fiscal stimulus passed by the US Congress
  4. Soaring stock and real estate prices.

Further, inflation may yet accelerate due to demand growth outstripping supply growth, rising materials costs and diminished inventories and the impact of inflation expectations on purchasing behaviour.

The Biden agenda, including higher minimum wages, strengthened unions, increased employee benefits and strengthened regulation - while replete with laudable intent - all push up business costs and prices.

The main argument - is it transitory?

However, US Federal Reserve Chair, Jerome Powell, continues to assert that any inflation will be “transitory” and reflect short-term supply imbalances as the economy recovers from the dislocation wrought by the COVID pandemic. Neither does the Fed Chair display any overt concern regarding financial market imbalances. 

However, on occasion, unless addressed, 'transitory' inflation can take on an air of permanence. In the words of former Australian Prime Minister Keating “the inflation genie gets out of the bottle,” and once that occurs, it is a difficult process getting that genie back.

That is precisely what happened with the oil price shocks of the 1970s when policy generally ‘accommodated’ the increase in oil prices. Not that the current circumstance is entirely redolent of what took place back then.

For the time being the bond market has given the Fed the benefit of the doubt and has bought the ‘transitory’ narrative. Nevertheless, the time is fast approaching when the Fed needs to articulate an exit strategy from the historically high levels of monetary accommodation.

Were the Fed to indicate that it is 'thinking about thinking about' the retreat from current levels of monetary stimulus, that would be timely for the RBA.

Inflation less evident in Australia

Inflationary pressures are present but less visible in Australia. The fiscal boost was way less than that applied in the US and the prospective regulatory agenda less ambitious.

While base effects will see June quarter annual ‘headline’ inflation likely get close to 4%, the RBA’s preferred trimmed mean measure is forecast to be around 1.5%, still well south of the RBA’s 2-3% target. Indeed, the RBA forecasts only have inflation reaching the bottom of the 2-3% inflation target band in June 2023, and even then, wages are forecast to be running at a paltry 2.25%.

The RBA has achieved its stated objective in pursuing yield curve control and QE of “keeping the AUD lower than it otherwise would have been”. In my view, it will not wish to unwind those achievements by prematurely foreshadowing a significant retreat from the currently historically high levels of monetary accommodation.

Were the Fed to signal that it is reviewing or about to review its level of stimulus, the capacity for the RBA to signal its own (ever so slight) retreat is enhanced without exerting unwanted upward pressure on the AUD.

Given the RBA’s unequivocal commitment to full employment, and given that despite progress on the unemployment front, it is still some way north of the 4% or even “3 point something” previously cited by the Governor as getting close to capacity, the RBA is likely to implement only marginal adjustments to its QE programme. Changes will be implemented flexibly and with caution, perhaps by signalling a likely weekly run-rate of purchases of bonds say between $2.5-$4 billion a week, which would follow the expiration of the current six-monthly $100 billion programme in September.

Such measures are at this stage rather small in the scheme of things given the prevailing expectation of the RBA Board that a policy rate increase is “unlikely to be until 2024 at the earliest.” 

It remains the case that while the economy’s performance has certainly exceeded expectations, recent price and wage growth remains at levels that are still uncomfortably low for the RBA and its inflation and employment objectives, and the economy is still some way from a level consistent with full capacity.

Whilever that remains, and while ever the Fed persists with current settings, and while ever there is no ‘lived experience’ of adequate wage and price inflation, we should expect the maintenance of the historically high accommodatory tack from the RBA.

A Fed retreat would give the RBA sufficient cover to commence a calibrated and marginal retreat.

But keep an eye out for that genie. If you see it, then it really might get interesting!

 

Stephen Miller is an Investment Strategist with GSFM, a sponsor of Firstlinks. He has previously worked in The Treasury and in the office of the then Treasurer, Paul Keating, from 1983-88. The views expressed are his own and do not consider the circumstances of any investor.

For more papers and articles from GSFM and partners, click here.

 

 

RELATED ARTICLES

It's not all about interest rates: give me a 1980s petshop galah!

US rate rises would challenge multi-asset diversified portfolios

Yikes! Three critical factors acting on inflation and rates

banner

Most viewed in recent weeks

Finding the best income-yielding assets

With fixed term deposit rates declining and bank hybrids being phased out, what are the best options for investors seeking income? This goes through the choices, and the opportunities and risks involved.

What history reveals about market corrections and crashes

The S&P 500's recent correction raises concerns about a bear market. History shows corrections are driven by high rates, unemployment, or global shocks, and that there's reason for optimism for nervous investors today. 

Howard Marks: the investing game has changed

The famed investor says the rapid switch from globalisation to trade wars is the biggest upheaval in the investing environment since World War Two. And a new world requires a different investment approach.

Welcome to Firstlinks Edition 605 with weekend update

Trump's tariffs and China's retaliatory strike have sent the Nasdaq into a bear market with the S&P 500 not far behind. What are the implications for the economy and markets, and what should investors do now? 

  • 3 April 2025

Designing a life, with money to spare

Are you living your life by default or by design? It strikes me that many people are doing the former and living according to others’ expectations of them, leading to poor choices including with their finances.

World's largest asset manager wants to revolutionise your portfolio

Larry Fink is one of the smartest people in the finance industry. In his latest shareholder letter, the Blackrock CEO outlines his quest to become the biggest player in private assets and upend investor portfolios.

Latest Updates

Investment strategies

An enlightened dividend path

While many chase high yields, true investment power lies in companies that steadily grow dividends. This strategy, rooted in patience and discipline, quietly compounds wealth and anchors investors through market turbulence.

Investment strategies

Don't let Trump derail your wealth creation plans

If you want to build wealth over the long-term, trying to guess the stock market's next move is generally a bad idea. In a month where this might be more tempting than ever, here is what you should focus on instead.

Economics

Pros and cons of Labor's home batteries scheme

Labor has announced a $2.3 billion Cheaper Home Batteries Program, aimed at slashing the cost of home batteries. The goal is to turbocharge battery uptake, though practical difficulties may prevent that happening.

Investment strategies

Will China's EV boom end in tears?

China's EV dominance is reshaping global auto markets - but with soaring tariffs, overcapacity, and rising scrutiny, the industry’s meteoric rise may face a turbulent road ahead. Can China maintain its lead - or will it stall?

Investment strategies

REITs: a haven in a Trumpian world?

Equity markets have been lashed by Trump's tariff policies, yet REITs have outperformed. Not only are they largely unaffected by tariffs, but they offer a unique combination of growth, sound fundamentals, and value.

Shares

Why Europe is back on the global investor map

European equities are surging ahead of the U.S this year, driven by strong earnings, undervaluation, and fiscal stimulus. With quality founder-led firms and a strengthening Euro, Europe may be the next global investment hotspot.

Chalmers' disingenuous budget claims

The Treasurer often touts a $207 billion improvement in Australia's financial position. A deeper look at the numbers reveals something less impressive, caused far more by commodity price surprises than policy.

Fixed interest

Duration: Friend or foe in a defensive allocation?

Duration is back. After years in the doghouse, shifting markets and higher yields are restoring its role as a reliable diversifier and income source - offering defensive strength in today’s uncertain environment.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.