Recession fears as Fed and RBA escalate war on inflation

What Lowe was effectively warning about was that if there were to be a pay break, the RBA would be forced to raise the cash rate more than it would otherwise and more than recoup, in real terms, those increases in revenue.

Both Lowe and Powell are signaling a fundamental change in monetary policies. From trying to balance inflation and labor market outcomes, they now have a singular focus on inflation, accepting that it will slow their economies and almost certainly lead to increases in unemployment and decreases in real wages.

The United States is preparing for a recession.

The United States is preparing for a recession.Credit:Bloomberg

With the US inflation rate highest in 40 years and Australia’s highest since the introduction of the GST in 2000, central bankers have no choice but to aggressively tighten their monetary policies.

They won’t want to push their economies into recession, but monetary policies are rudimentary tools, unable to be deployed against two targets at once. It is abundantly clear that, with their peers elsewhere, the RBA and Fed are now squarely focused on inflation, even if that means less growth and higher unemployment.

Former New York Fed President Bill Dudley wrote for Bloomberg this week that a US recession within the next 12 to 18 months was inevitable because the focus on inflation would be “unrelenting,” with Powell desperate. for avoiding the mistakes of the late 1960s and 1970s, when inflation ran rampant and finally forced the Fed into a very harsh response and the US economy into a severe recession.


Australia experienced something similar in the early 1990s, with Paul Keating’s “recession Australia had to have”.

The challenge for the RBA, the Fed and their peers (Europe is also experiencing high levels of inflation) is that there are elements of the rise in global inflation rates that are outside of their control, some of which might fit the label of “transients” that made central bankers complacent last year even as inflation rates began to rise.

In fact, it is difficult to separate the structural and semi-permanent influences from the transitory ones because it was the pandemic, the responses of central banks and their governments and its impact on global economic activity and the supply chains that support it. ignited inflation after decades of lethargy.

Some of those factors could be transitory, such as the disruption of global supply chains, but while there are some positive signs, the transition could still be longer than currently expected and continue to fuel product shortages and increases in prices. prices, which is the best. illustrated by waiting times and rapidly rising prices for new cars.

The pandemic and the lockdowns, travel restrictions and changes in attitudes towards work that it induced are also reflected in tight labor markets, with companies struggling to attract workers and wages rising as a consequence.

China’s zero COVID policy, though recently eased, is also having an impact on the availability of a wide range of consumer and industrial goods, even as consumer demand, globally, has slowed. considerably recovered.

If the RBA and the Fed can get inflation rates back into their target ranges without forcing their economies into recession, their efforts would be masterpieces of central banking.

In response to the pandemic, governments in major economies have flooded their economies with generous support programs and broader fiscal stimulus, coupled with extremely loose monetary policies and ultra-low interest rates and the cost of credit, and left consumers inundated with record levels of savings. .

Then Russia invaded Ukraine and was sanctioned by the West and energy and food prices exploded.
Given the propensity of COVID-19 to evolve, it cannot be assumed that the pandemic is behind us or, with China committed to its response to outbreaks, that supply chains will function more normally any time soon.


The war in Ukraine could go on for quite some time. Meanwhile, Ukraine’s ability to supply grain and fertilizer to the world market is seriously declining and Russia’s oil industry is being degraded by sanctions and cutting off access to Western technology and expertise.

Oil prices have fallen back from their levels of a fortnight ago, down from around $124 a barrel to around $111 a barrel, which could help alleviate some of the inflationary pressures, but the reason for the fall is revealing.

The oil market is pricing in lower demand as traders are starting to price in on the prospect of recessions and reduced demand.

Central banking is both an art and a science. If the RBA and the Fed can get inflation rates back into their target ranges without forcing their economies into recession, their efforts would be masterpieces of central banking.

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