ON MY desk I keep a list of doves and hawks in the US Federal Open Market Committee — the group that makes monetary policy decisions for the Federal Reserve.
This helps when the 12 voting members — who meet eight times a year on proposed changes to near-term monetary policy — issue comments about their latest decision.
Australia doesn’t have monetary policy “voters” as such.
The RBA bureaucrats present their recommendations to the board. What happens next is top secret — though a source once told me there’s only been one occasion the board has begged to differ.
Which system works best is up for debate. I tend to side with the RBA and the view that too much transparency in decisions can confuse and backfire.
Nevertheless the RBA now provides comprehensive minutes of its meetings — even if they are more RBA staff comments than actual minutes.
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There are two major upcoming events that bear close watching around this.
Firstly, next week Joe Biden will announce the new Fed Reserve Chair.
Jerome Powell is still favourite to be reappointed but if betting agencies are to be believed Lael Brainard — an economist who’s been on the Fed’s board of governors since 2014 — has a decent chance.
Both are considered centrist on the spectrum. But the prospect of Brainard alongside dovish US treasury secretary Janet Yellen is seen as a nod to a more progressive stance in fiscal and monetary policy.
Markets would likely view it as more dovish in the medium to long term even if near term a change of guard might rattle a few.
The second event to watch for is next week’s release of Australia wages numbers on Thursday.
RBA governor Phil Lowe’s current “dovish” stance on inflation is based on the strong view that you need significantly higher wage growth (at least 3% but likely more) if inflation is to sustain a 2.5% level.
As Dr Lowe said in a speech this week, Australia’s wage system is always slow to move given the award structure.
Getting back to 2.5% wage growth should be easy since even the public sector — around 20% of workers — has now moved back to 2.5% targets. However he thinks a move above 3% is unlikely till late 2023.
Therefore debate will continue on whether central banks are being too slow to tighten.
Bond markets for now believe they will move quicker than their words suggest but few are predicting a major policy error.
Bonds are settling down after a torrid October.
Markets have already priced decent hikes.
For our upcoming Australian Quarterly report I am writing a piece on what would be needed to push bond rates up significantly from here in the medium term.
Tim Hext is a portfolio manager and head of government bond strategies for Pendal’s Income and Fixed Interest team.
Tim has extensive experience in banking, financial markets and funding including senior positions with NSW Treasury Corporation (TCorp), Westpac Treasury, Commonwealth Bank of Australia, Deutsche Bank, Bain & Co and Swiss Bank Corporation.
Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.
The team won Lonsec’s Active Fixed Income Fund of the Year award in 2021 and Zenith’s Australian Fixed Interest award in 2020.
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