Australia far better placed to deal with downturn than the US: Kohler

What a difference 15,000 kilometres makes. Yesterday the Reserve Bank of Australia said its work was done on inflation; last night the US Federal Reserve said the “upside risks to inflation are of significant concern”.

What a difference 15,000 kilometres makes. Yesterday the Reserve Bank of Australia said its work was done on inflation; last night the US Federal Reserve said the “upside risks to inflation are of significant concern”.

They both did the same thing – left rates on hold – but the way they did it was vastly different.

There was even talk that the Fed might raise rates, something Bill Gross of Pimco described as “comical”.

One member of the Federal Open Market Committee, Richard W Fisher from Dallas Texas, did actually vote for an increase, and there was a story on Bloomberg, before the vote, that chairman Ben Bernanke was facing a revolt from three of them.

Bloomberg predicted, wrongly as it turned out, that two other members – Gary Stern from the Fed’s Bank of Minneapolis, and the Philadelphia Fed’s Charles Plosser – would also dissent in last night’s vote. In the end Plosser and Stern voted in favour of Bernanke’s “on hold” recommendation, although they may have had to be mollified by a tough statement.

In any case, the past 24 hours has perfectly displayed what different places the Australian and American central banks are in.

The terms of trade boom has allowed the RBA to run a restrictive monetary policy, with the official rate at 7.25%, while the Fed has been desperately cutting rates to rescue the US financial system and now has the Fed funds rate at an accommodative 2%.

Both economies may be sliding into recession, the US faster than Australia; the RBA can do something about it, but the Fed can’t, or at least not much.

Indeed with inflation where it is, the Fed funds rate may have to stay on hold for quite a while. Any proposal from Bernanke to cut rates would certainly increase the number of dissenters on the committee, and possibly lead to him being outvoted, as the Bank of England’s Governor Mervyn King has been twice lately.

Meanwhile, as the Fed lies paralysed by the side of the road, the RBA stands ready to cut, possibly by 50 basis points in September.

And there’s unlikely to be any dissent with that from the business people on the RBA board. But we’ll never know of course.

The price of having people from the real world on one’s central bank board – apart from the occasional failure to pay tax – is that their votes are secret so they don’t have to go back out into the real world and explain themselves to their mates.

This article first appeared on Business Spectator

 

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