Adrian Vanzyl on the Fed’s Hike and the RBA’s Turn

The Federal Reserve just made the decision markets had been bracing for. As Adrian Vanzyl, I think what happens next in Australia matters more than the Fed move itself. The FOMC voted unanimously overnight to lift US interest rates by 25 basis points. Its own ‘dot plot’ shows 16 of 18 Fed officials expect at least one more hike before year’s end. US shares fell on the news, but here in Australia, the local market actually closed higher.

Adrian Vanzyl finds that divergence worth sitting with. A rate hike from the world’s most influential central bank usually rattles markets everywhere. It did exactly that on Wall Street. Australia shrugging it off isn’t a sign the news didn’t matter locally. “It’s more likely a sign the market had already priced in what comes next. Economists now put the odds at nearly 90 per cent. They expect the RBA to lift its cash rate to 4.6 per cent at its September 29 meeting. That follows the Fed and Bank of Japan’s moves this week. When a move is this thoroughly expected, the market has often finished reacting before the announcement even happens.

A Slowing Economy Meeting a More Aggressive Central Bank

What makes this tightening cycle harder to read than most, in Adrian Vanzyl’s view, is the mismatch AMP’s deputy chief economist has pointed to: Australian shares are flat for the week, down roughly 4 per cent for the month, and have had no growth at all since the start of the year, a result AMP attributes to the RBA being more aggressive than the Fed relative to where each economy actually sits. A slowing economy usually argues for easier policy, not tighter. The RBA is choosing tighter anyway. It’s still focused on stopping inflation from becoming embedded into how businesses set prices and wages.

That’s a defensible position, but it’s not a comfortable one for households already absorbing higher borrowing costs while economic momentum cools. Adrian Vanzyl thinks the September 29 meeting is shaping up as a genuine test of that trade-off, not the formality markets are currently treating it as.

Conclusion

I’d read today, in Adrian Vanzyl’s view, as confirmation that the world’s major central banks are moving in the same direction at the same time, even as the economies underneath them are telling increasingly different stories. The Fed hiked into an economy still showing some strength. The RBA looks set to hike into one that’s visibly slowing. Both are chasing the same inflation target, but Australia is paying a steeper price for that pursuit, and the market’s 90 per cent certainty about September 29 says more about how inevitable that price now feels than about whether it’s actually the right call.