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MNI BCB WATCH: Fifth Straight 25BP Cut As Inflation Improves
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Markets widely expect the Federal Reserve to raise interest rates this week and signal additional hikes to come, but the lack of a clear reaction function from Chairman Kevin Warsh has added risks around the outcome of the September FOMC meeting.
The August CPI report Friday was firm enough to convince officials that tighter monetary policy is needed in light of persistent price pressures. Core CPI climbed a stronger-than-expected 0.29%, which translates roughly to a 2.7-2.8% core PCE rate on a three-month annualized basis, with the 12-month figure continuing to run well above 3%, according to analyst projections.
The August jobs report also surprised on the stronger side, underscoring that elevated inflation remains the Fed's focus.
Traders are pricing in a more than 90% probability of a hike Wednesday and 93 bps of tightening through June. (See MNI INTERVIEW: Clock Is Ticking On Fed To Hike - Lockhart)
The chairman has emphasized the importance of market signals, in addition to acknowledging that he would be "hard pressed" to say financial conditions are currently restrictive.
“We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do," Warsh said at the Kansas City Fed symposium in Jackson Hole.
The Fed needs to act to maintain its inflation-fighting credibility in light of the new data, former officials told MNI. (See MNI INTERVIEW: Hawkish Warsh Needs To Show He Means It- Evans)
"For credibility's sake alone they've got to make a move," former Philadelphia Fed President Patrick Harker said. (See MNI INTERVIEW: Harker Says Fed Hike Likely This Week)
Yet former Fed officials and staffers say Warsh also likely has the votes for staying on hold, should he wish to make that argument. (See MNI INTERVIEW: Risks To Fed Independence Growing)
A core group of FOMC members still prefers to wait and see how inflation plays out in the second half of this year, not wanting to weaken the economy unnecessarily. (See MNI POLICY: Fed Hike In Doubt, Despite Pressure To Deliver)
SHALLOW CYCLE
A fresh set of projections this week is likely to show a second hike before year-end and potentially one more next year, ex-Fed officials and staffers said. (See MNI INTERVIEW:Fed To Hike Once Or Twice, Timing Unclear-Chabot)
If inflation continues to moderate, the Fed may pause there. However, should price pressures worsen at year-end, the Fed may keep hiking at a measured pace, former senior Fed adviser Kurt Lewis told MNI. (See MNI INTERVIEW: Fed Rates Likely To Peak 75 BP Higher - Lewis)
Warsh won't explicitly guide expectations for the path forward, and much will be dependent on the energy crisis and trade policy.
Sep-15 00:36
The Federal Reserve will likely take benchmark interest rates 75 basis point higher over the coming months before pausing, but don't expect Chairman Kevin Warsh to explicitly manage market expectations for how steep the path will be this week, former senior Fed adviser Kurt Lewis told MNI.
Lewis, who changed his own September FOMC call to a hike after the August CPI report nudged the case over the threshold, said he expects the committee to raise rates three times as long as inflation continues moderating slowly, with tariff effects fading and second-round effects from the oil shock absent.
But should inflation get worse in the fourth quarter, the committee is likely to continue to march rates higher, he said, noting core PCE inflation is on track to finish the year at 3.0-3.1% for a third consecutive year.
"If they're seeing a moderating trend, it's just not happening very quickly, then I think they go up 75, wait there for a while and settle down," he said.
"If we get into the new year, especially if Q4 inflation just keeps getting worse, and we end the year meaningfully above 3%, then I think they would keep going in these 25 basis point increments. Not very quickly, but there would definitely be much more than 75 basis points." (See MNI INTERVIEW: Harker Says Fed Hike Likely This Week)
OCTOBER DECISION
The likely hike this week reflects a continuation of pressures that have been building since June, said Lewis, now head of central bank policy at Piper Sandler.
"The thing that's a little underappreciated is they have been close to this threshold for a while," he said. Officials including Governor Chris Waller have said they're comfortable staying on hold only as long as things continued to get better. "Things had to continue to go right, and they didn't by just barely enough."
Chairman Kevin Warsh has also leaned into the market's being an important indicator, Lewis said, and traders are currently pricing in over 90% probability of a hike this week and 92 bps of increases through June 2027.
The FOMC is likely to act again in October, in spite of the proximity of midterm elections, if the September inflation reports appear to be worse than expected, Lewis said. "The election piece of this is just not as big a deal in the room as it is to everybody else."
Asked whether Warsh would opt for a larger half-point move this week to reassert credibility, Lewis said the votes might be there if Warsh wanted it but that path looks unlikely. A larger increase would raise questions about the committee's near-term intentions that Warsh would struggle to answer without committing to more explicit guidance than he's willing to give, he said.
"It opens up the uncertainty aperture wider, right? And he's not in the business of over-communicating about the policy trajectory. So to the extent that you surprise people to the upside, you risk telling them we're more worried than you thought, things really are different now than they were a month ago, and whether we are going to go 100 basis points or more is now on the table." (See MNI INTERVIEW: Clock Is Ticking On Fed To Hike - Lockhart)
INDIRECT GUIDANCE
Warsh is similarly unlikely to offer explicit forward guidance about the pace of hikes, since doing so would cut against his own stated preference to let markets read the data cleanly, Lewis said.
Instead, any indication of caution will show up only indirectly, perhaps through a description of some underlying inflation indicators as having performed better in August, he said. More likely, Warsh sticks to describing the SEP projections at a high level and telling reporters to ignore the dots as any promise of future action.
August inflation data have strengthened the case for rate hike at this week's FOMC meeting and another before year-end, former Atlanta Fed President Dennis Lockhart told MNI, arguing that the hypothesis that price pressures from tariffs and the Iran war are fading in the second half of the year is looking less valid.
"The data are in. The narrative has not changed: elevated and persistent inflation that's gone on for a long time, with a solid and stable employment picture. The narrative continues to be missing the inflation objective by a substantial amount," he said in an interview.
"So the clock is ticking, and it calls for action. I would hope that they will take action at this meeting, and I actually think they'll do damage if they choose not to."
Core CPI rose a firmer-than-expected 0.29% in August. The data translate roughly into a 2.7-2.8% core PCE rate on a three-month annualized basis, with the 12-month figure continuing to run well above 3%, according to analyst projections.
Moreover, the supply-side forces underpinning the Fed's wait-and-see posture have shifted since earlier this year, he said. Oil prices have climbed above USD100 a barrel amid renewed friction in the Strait of Hormuz, and new 50% tariffs on a range of Canadian goods have added to cost pressures. (See MNI INTERVIEW: Harker Says Fed Hike Likely This Week)
FED CREDIBILITY
Even a larger 50-basis-point move cannot be ruled out, Lockhart said.
Strong action would lend credibility to Chairman Kevin Warsh's inflation-fighting rhetoric and, importantly, allow the committee to skip action at its October meeting -- consistent with a longstanding informal practice of avoiding major policy shifts close to elections.
"It buys time. And they may say, 'If we're going to hike, maybe we just frontload it,'" he said.
A hold this week could damage the Fed's credibility, given how strongly markets have priced in a hike following Warsh's public commitment to restoring price stability at Jackson Hole, he said.
"The Texas phrase 'all hat, no cattle' is making its rounds among people in the market every day," Lockhart said. "Decisions by the committee truly are apolitical, data-dependent and data-driven. But I don't think the credibility argument is irrelevant here." (See MNI INTERVIEW: Fed To Hike Once Or Twice, Timing Unclear-Chabot)
DOTS RISING
The median rate projection this week could show the policy rate 50 basis points higher by year-end, right in the center of a fairly mixed group, Lockhart said.
"The committee knows that one 25-basis-point hike isn't going to accomplish much. Among some of the hawks there will probably be projections for a 75-basis-point increase by year-end, and there will be some who will project a hold through year-end," he said.
"And you can have some inconsistency between the decision made in the meeting and the SEP projections that come in the week before. The 'hold' doves may not readjust their dot at the meeting, if the consensus is to hike."
Interestingly, Warsh's decision not to submit his own dots could prompt some officials to treat their projections less as forecasts than as signals, Lockhart said.
A policymaker on the fence between 50 and 75bp higher rates this year might put in 75 to send a message, he said.
"The chair's decision not to participate reduces the seriousness of the exercise. And with it being less serious, I would not be totally surprised if one or two members decide that they're going to put in a projection -- which they know they can revise at the end of the year anyway -- that has message content."
Sep-14 13:55
(Repeats story first published Friday.)
Talks to end the U.S.-Canada trade war remain distant and that strengthens Prime Minister Mark Carney's hand as pressure mounts on President Donald Trump to ease the tariff burden on American companies and voters, Canada's chief negotiator in prior USMCA talks told MNI.
“There will be increasing pressure on President Trump with this tariff agenda, partly because it's not really working," Steve Verheul said Friday in a phone interview.
"There's virtually no support for these tariffs in U.S. industry -- very little support among the American public, and even Republicans if they're being honest and talking freely will indicate that they're not supportive,” Verheul said.
Weakness in U.S. factory production and employment, in addition to elevated U.S. trade deficits, underline the lack of tariff success according to Verheul. (See: MNI INTERVIEW: Trump CAD Talk Won't Trim Deficit-Manufacturers)
Returning to substantial talks will take time following the recent breakdown, said Verheul. Trump now faces more pressure to come up with a political win, whilte Carney has encountered resistance from provincial leaders to tariffs threatening key industries.
PRICE OF ADMISSION
“There's a difficulty in getting back to the negotiating table because it's not clear what the starting point would be," he said. "Canada may not be able to go back to the kinds of signals that they sent before. The U.S. is going to be increasingly facing pressure behind them to be more dominating.”
While Carney's bargaining power is aided by his higher popularity attempting to wait Trump out through midterms or his regular mandate won't work because American leaders do back a `price of admission' to the U.S., Verheul said.
“What we consider to be normal a number of years ago, when we had the new trade agreement and it was working well, I don't think we're going to get back there anytime soon,” he said. “There are ways to do it, and it may involve some modest level of tariff, but it's got to be at a point where it's not going to mean there will be structural changes that help significant amounts of production to the U.S.” (See: MNI INTERVIEW: Carney-Trump Deal Will Include Tariffs-Chamber)
That price of admission will also include Canada and Mexico aligning to limit dealings with China including direct investment in North America and limits on strategic exports, Verheul said.
NARROW CHINA PATH
Canada must beware of adding to recent moves boosting trade with China in canola and seafood and especially its quota for importing 49,000 electric cars a year, Verheul said. “It is mainly on the commodity side where it's safer ground as long as we're not touching anything the U.S. considered strategic,” he said.
Limits on dealing with China may ease if Trump expands trade with the world's second-largest economy in his upcoming meeting with Chinese President Xi Jinping, Verheul said. "The U.S. is actively discouraging Canada from getting closer to China, but if they're going to reach some kind of agreement that brings them closer to China, that should change the picture somewhat,” he said.
This week's U.S. trade restrictions against Canada added little economic damage but provide only the start of a path back to negotiations, Verheul said. The modified list of products facing tariffs didn’t expand the total hit much, and most import bans applied to products already facing 50% tariffs, he said.
“They were deliberately not looking to promote further escalation. So I think we're likely to see a bit of a calmer period going forward, but we'll both be in a kind of a waiting mode," Verheul said. For Canada, "I don't think that's really a bad thing because I think conditions will start to look a little bit better.”
Sep-14 11:18
The Federal Reserve is likely to raise interest rates this week in order to maintain its inflation-fighting credibility in the face of persistent price pressures that have been reinforced by the latest data, former Philadelphia Fed President Patrick Harker told MNI.
“They’ve got to make a move. For credibility’s sake alone they’ve got to make a move. And they’re going to make the move,” Harker said in an interview.
“With the PPI and the CPI, and just the history here. It'd be one thing to say, well, it's above trend but we've been below trend recently. We haven’t, for five plus years.” Core CPI rose 0.3% in August, boosting market expectations for a quarter-point September rate rise to over 80%.
That said, Harker does not believe the central bank is about to embark on a prolonged tightening cycle, but is more likely to deliver just one or two increases in official borrowing costs.
“My guess would be they go now, take a break in October because they don't want the image of looking like they're interfering with the election, and then maybe in December. But I don't see much more than that,” said Harker, now a professor at the Wharton School.
“If this were a textbook economy without having supply shock after supply shock after supply shock, I would say, that's what I'm thinking – just 50, and they're pretty close. I think they're slightly accommodative now, 50 might put them in slightly restrictive,” he added. “The problem is we keep getting hit with these supply shocks – tariffs on, tariffs off, Straits open, Straits closed. Monetary policy can't do a whole lot about any of that.”
INFLATION PREMIUM
Despite U.S. President Donald Trump’s repeated calls for lower rates, his administration might actually benefit from modest Fed tightening, said Harker.
“This may, in an odd way, get the president what he wants without knowing it. If you look at what's driving the long end of the curve, it's three things: it's the crowding out because of the AI investment; it's the deficit, and it's investors asking for more compensation to cover inflation. There's an inflation premium,” he said.
“If the Fed raises once or twice, 25 this time, 25 another time, it's not going to do a whole lot to actually affect the economy because the long end has already gone up, and that's what matters, not the fed funds rate. But it would signal to the market the Fed's serious about getting the 2% and that in turn could – and I'm not saying will – but could, lower the inflation premium.” (See MNI INTERVIEW: Fed To Hike Once Or Twice, Timing Unclear-Chabot)
AI INFLATION
The AI boom for now is exhibiting itself as an inflationary force even if it should eventually engender the kind of productivity boom the economy needs, said Harker.
“It’s bidding up every piece of electric equipment that you can get your hands on. It's bidding up all kinds of resources. So that is absolutely, in the short run as we build this infrastructure out, causing at least some inflation, particularly around those goods,” he said.
“In the longer run, there's no question it's going to improve productivity because we're going sideways and negative on the labor force because of demographics and immigration policy, so we need it to be above trend for a while.”
Sep-14 10:49
You are invited to listen to a Livestreamed MNI Connect Video Conference with ECB Executive Board Member, Piero Cipollone.
Details below:
- Speaker: ECB Executive Board Member,Piero Cipollone.
- Topic of discussion: ‘Money in the Digital Age: Digital Euro, Tokenisation and the Role of Central Banks’
- Date: Tuesday 6 October from 1400-15.30 London/0900-10.30 ET/15:00-16:30 CET
- This event will be run as a Zoom Webinar and is a public, on-the-record event.
To register please go to: MNI Webcast Registration
China’s fixed-asset investment will likely continue to decline this year, with weakness persisting over the next one-two years as the economy shifts towards new growth drivers, advisors told MNI, adding infrastructure investment may turn positive as early as Q4 amid a policy push.
Government-led infrastructure construction will likely rebound on faster disbursement of funds, helping to partly cushion the property investment slump, as broader fixed-asset investment falls an expected 4-5% year-on-year this year, narrowing from the 6.7% drop in the first seven months, said Gong Liutang, director of the Institute for Advanced Study at Wuhan University.
Lu Donghong, associate research fellow at the Chongyang Institute for Financial Studies at Renmin University, sees a wider range of 4-6% decline over 2026, adding that Q3 would mark the trough before a Q4 recovery driven by physical workloads generated by accelerated sales of local government special bonds in Q3 and the disbursement of CNY800 billion in policy-based financial instruments starting in September.
Wen Bin, chief economist at China Minsheng Bank, expects fixed-asset investment to fall slightly further by 7% in the Jan-Aug period. The National Bureau of Statistics is due to release the latest data on Tuesday.
INFRASTRUCTURE SPEND
Lu noted it takes three-six months to generate physical workloads after funds are disbursed, but a lack of projects meeting the criteria and local authorities’ caution over projects amid debt repayment pressure remain medium-term constraints.
Gong highlighted the declining effectiveness of fiscal and monetary policies, saying they are now only about two-thirds as effective as they used to be. Last year’s CNY500 billion in policy-based financial instruments, intended to replenish the capital of major projects, leveraged 14 times the initial investment to generate about CNY7 trillion in total investment.
This year’s CNY800 billion may only be able to leverage 10 times, he said, calling for renewed measures to activate private investment, which fell 9.4% y/y in the first seven months, as government debt-financed investment has its limits. (See MNI: Advisors See New Bond Quotas To Bolster China Growth)
Lu argued this year’s CNY800 billion was mainly invested in the so-called “six networks”, including computing power and communications infrastructure, which have long return cycles and uncertain operating cash flows. This makes it difficult to leverage tenfold or more in matching loans given banks’ low risk appetite.
STRUCTURAL GROWTH
The economy, however, remains on track to meet its annual growth target of 4.5-5%, as authorities tend to tolerate slower growth against the backdrop of economic transition, Gong said. “Given the 4.7% growth recorded in H1, only about 4.3% more growth on average in H2 is needed to reach the lower end of the target range,” he said.
Despite the official emphasis on structural upgrades, including 5% year-on-year growth in high-tech investment during the January-July period, Lu warned that its scale and impact on upstream and downstream industries are not comparable with traditional infrastructure. “Structural upgrades can provide a buffer for about one-two years, during which the total volume of investment should stabilise to feed through and sustain the upgrade,” Lu said, adding that a sustained decline in investment volumes would hurt corporate profits and household incomes and further weaken demand for new industries.
Gong estimates investment growth will likely face downward pressure in the first half of the 15th Five-Year Plan period (2026-2030), as the property market may gradually reach a new equilibrium around 2028, provided housing inventories and local government implicit debt are addressed and a new housing development model established. He remains optimistic that the economy will make substantial progress in transitioning from old to new growth drivers over the next five years. By 2030, the value-added of the so-called “Three New” economy is projected to rise from 18.01% of GDP in 2024 to over 20%, with per capita GDP likely to increase further from 2025’s level of about USD14,000.
“It is a crucial period for achieving the country’s 2035 goal of reaching its per capita GDP level of a moderately developed nation,” Gong said. “It will become increasingly difficult to reach the goal if the transition proves significantly slower than anticipated.”
Sep-14 03:38Talks to end the U.S.-Canada trade war remain distant and that strengthens Prime Minister Mark Carney's hand as pressure mounts on President Donald Trump to ease the tariff burden on American companies and voters, Canada's chief negotiator in prior USMCA talks told MNI.
“There will be increasing pressure on President Trump with this tariff agenda, partly because it's not really working," Steve Verheul said Friday in a phone interview.
"There's virtually no support for these tariffs in U.S. industry -- very little support among the American public, and even Republicans if they're being honest and talking freely will indicate that they're not supportive,” Verheul said.
Weakness in U.S. factory production and employment, in addition to elevated U.S. trade deficits, underline the lack of tariff success according to Verheul. (See: MNI INTERVIEW: Trump CAD Talk Won't Trim Deficit-Manufacturers)
Returning to substantial talks will take time following the recent breakdown, said Verheul. Trump now faces more pressure to come up with a political win, whilte Carney has encountered resistance from provincial leaders to tariffs threatening key industries.
PRICE OF ADMISSION
“There's a difficulty in getting back to the negotiating table because it's not clear what the starting point would be," he said. "Canada may not be able to go back to the kinds of signals that they sent before. The U.S. is going to be increasingly facing pressure behind them to be more dominating.”
While Carney's bargaining power is aided by his higher popularity attempting to wait Trump out through midterms or his regular mandate won't work because American leaders do back a `price of admission' to the U.S., Verheul said.
“What we consider to be normal a number of years ago, when we had the new trade agreement and it was working well, I don't think we're going to get back there anytime soon,” he said. “There are ways to do it, and it may involve some modest level of tariff, but it's got to be at a point where it's not going to mean there will be structural changes that help significant amounts of production to the U.S.” (See: MNI INTERVIEW: Carney-Trump Deal Will Include Tariffs-Chamber)
That price of admission will also include Canada and Mexico aligning to limit dealings with China including direct investment in North America and limits on strategic exports, Verheul said.
NARROW CHINA PATH
Canada must beware of adding to recent moves boosting trade with China in canola and seafood and especially its quota for importing 49,000 electric cars a year, Verheul said. “It is mainly on the commodity side where it's safer ground as long as we're not touching anything the U.S. considered strategic,” he said.
Limits on dealing with China may ease if Trump expands trade with the world's second-largest economy in his upcoming meeting with Chinese President Xi Jinping, Verheul said. "The U.S. is actively discouraging Canada from getting closer to China, but if they're going to reach some kind of agreement that brings them closer to China, that should change the picture somewhat,” he said.
This week's U.S. trade restrictions against Canada added little economic damage but provide only the start of a path back to negotiations, Verheul said. The modified list of products facing tariffs didn’t expand the total hit much, and most import bans applied to products already facing 50% tariffs, he said.
“They were deliberately not looking to promote further escalation. So I think we're likely to see a bit of a calmer period going forward, but we'll both be in a kind of a waiting mode," Verheul said. For Canada, "I don't think that's really a bad thing because I think conditions will start to look a little bit better.”
Sep-11 18:19
A proposal to boost the competitiveness of EU products by reducing non-wage labour costs and financing the move by increasing VAT is one of many options under discussion between European Union member states as they seek ways to compete with China, Bruegel senior fellow Alicia Garcia-Herrero told MNI.
Garcia-Herrero, also Natixis Asia-Pacific chief economist, noted that this approach has been mooted in the past without success and was unlikely to be adopted, though it comes as Germany moves closer to France’s more China-sceptic position.
“Reduce the payroll-tax wedge that employers pay, so hiring becomes cheaper, and replace the lost social-security revenue with a higher VAT. The argument is that this would lower unit labour costs for producers while the extra VAT is paid by consumers, including on imports,” she said. “This is the kind of tax-shift that people have talked about for years when they want to improve cost competitiveness without cutting take-home pay."
EU officials contacted by MNI are sceptical that the "Social VAT" idea is practical, given the difficulties of coordinating an increase in VAT rates, which remains a national-level competence of 27 EU member states. (See MNI: EU Aims To Reduce China-Dependence, Avoid Trade War)
FX DRIVE
France continues to argue for an EU push to prompt an appreciation of the nominal Chinese exchange rate, but Garcia-Herrero noted that the Chinese are unlikely to agree such a request, which would anyway be insufficient to repair Europe’s competitive disadvantage.
"Most of the action is coming through the inflation differential and, without a real gain in competitiveness, we cannot do much,” she said.
EU-China talks on trade flows are continuing at technical level, with EU Trade Commissioner Maros Sefcovic talking recently of the possibility of pilot projects involving EU-China cooperation at the level of sectors. The EU is also said to be making progress with its diversification tool, which would require companies to have two to three alternative suppliers of key strategic raw materials and other inputs in order to weaken China's leverage in trade disputes with the EU. (See MNI: EU Debates Whether 'Made In Europe' Includes Canada)
Garcia-Herrero is also an adviser to the Spanish government and the Hong Kong Monetary Authority.
Sep-11 14:23
Recent comments by senior Reserve Bank of Australia officials indicate a hawkish shift that makes one further 25 basis point hike to the 4.35% cash rate more likely and a second increase a strong possibility, former staff told MNI, noting that higher inflation and the risk of unanchored expectations are testing the Bank’s patience.
“CPI came in surprisingly high, and that is an important bit of news for them to be commenting on,” said Peter Tulip, chief economist at the Centre for Independent Studies and a former senior RBA official, pointing to hawkish comments from Deputy Governor Andrew Hauser and Assistant Governor Sarah Hunter this week. “The outlook for interest rates has become much more hawkish, and RBA commentary is in line with that.”
Trimmed-mean inflation was 3.6% y/y in July, unchanged from June but 10 basis points above expectations, while headline inflation eased to 3.5% from 3.8% but was 20bp above expectations, Australian Bureau of Statistics data showed last month.
Tulip believes the Bank will need two further 25bp hikes to contain inflation, but will likely raise rates at either the September or November meeting before pausing to assess further data.
Mariano Kulish, professor at the University of Sydney and a former senior RBA economist, believes the Bank is paving the way for a hike at its Sept 29 meeting, which markets currently price at a 82% probability. “The banks' forecasts in August weren't as hawkish as what the market sees now," he said, pointing to the market's 4.8% terminal rate by Q1. "And then the question is, well is that enough?”
Markets have since moved up their expectations to a 5% rate by June.
Kulish wants the RBA to raise the cash rate consistently until inflation returns to target, rather than stopping when it merely sees evidence that inflation is likely to fall, arguing the Reserve's recent experience suggests its forecasts have not fully captured the persistence of price pressures, making a wait-and-see approach risky.
STICKY INFLATION
The latest data showed underlying inflation had proved stickier than the Bank expected, he added, following an earlier assessment that excess demand was already too strong and the additional inflationary shock from the Iran conflict and higher oil prices. The RBA needs to communicate more clearly that it is prepared to accept some slowdown in economic activity as part of restoring the balance between supply and demand, he added.
Tulip said the RBA should focus on the persistence and broader economic effects of supply shocks rather than their origin, with the appropriate policy response depending on whether they ultimately boost or reduce activity. “If the rain comes from a cumulus cloud or a cirrus cloud, it doesn't really make any difference, you still put up your umbrella,” he quipped, noting higher oil prices would warrant stronger monetary policy if their effects proved persistent, while a supply shock that reduced economic activity could limit the need for further tightening.
HOUSING TRANSMISSION
The extent of transmission of higher interest rates through the housing market and into consumer sentiment and spending remains difficult to quantify, Tulip noted, arguing recent market declines should not factor into the Bank's cash rate strategy.
Kulish similarly argued that the RBA should prioritise its price stability mandate over concerns about the housing market or employment, warning that prolonged inflation above target could eventually push expectations higher. The Bank should be willing to tolerate a greater slowdown in activity if needed to restore price stability and avoid repeating a pattern of tightening too little and too late, he added.
Tulip said the RBA could ultimately need to tighten more aggressively, but should then be ready to act to reduce rates as the economy responds, avoiding past mistakes of keeping the cash rate elevated for longer.
Sep-11 00:16About
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