See the latest Australian dollar analysis here:
The US Federal Reserve last night dropped a deflationary bomb on Australia:
Following an extensive review that included numerous public events across the country, the Federal Open Market Committee (FOMC) on Thursday announced the unanimous approval of updates to its Statement on Longer-Run Goals and Monetary Policy Strategy, which articulates its approach to monetary policy and serves as the foundation for its policy actions. The updates reflect changes in the economy over the past decade and how policymakers are taking these changes into account in conducting monetary policy. The updated statement is also intended to enhance the transparency, accountability and effectiveness of monetary policy.
“The economy is always evolving, and the FOMC’s strategy for achieving its goals must adapt to meet the new challenges that arise,” said Federal Reserve Chair Jerome H. Powell. “Our revised statement reflects our appreciation for the benefits of a strong labor market, particularly for many in low- and moderate-income communities, and that a robust job market can be sustained without causing an unwelcome increase in inflation.”
Among the more significant changes to the framework document are:
- On maximum employment, the FOMC emphasized that maximum employment is a broad-based and inclusive goal and reports that its policy decision will be informed by its “assessments of the shortfalls of employment from its maximum level.” The original document referred to “deviations from its maximum level.”
- On price stability, the FOMC adjusted its strategy for achieving its longer-run inflation goal of 2 percent by noting that it “seeks to achieve inflation that averages 2 percent over time.” To this end, the revised statement states that “following periods when inflation has been running persistently below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time.”
- The updates to the strategy statement explicitly acknowledge the challenges for monetary policy posed by a persistently low interest rate environment. Here in the United States and around the world, monetary policy interest rates are more likely to be constrained by their effective lower-bound than in the past.
The Committee first adopted a framework statement in 2012.
…The FOMC reported it would continue its practice of considering the Statement of Longer-Run Goals and Policy each January and that it intends to undertake a public review of its monetary policy strategy, tools, and communication practices roughly every 5 years.
In effect, the Fed just created one-way bet on the Australian dollar as either a better recovery with tolerated higher inflation means buy commodities as a hedge or no recovery with deflation means a more aggressive Fed.
If the RBA does not fight the Fed now then a rising currency is going to drop a deflationary atom bomb on Australia:
- consumption is buggered as house prices fall;
- the fiscal cliff is locked-in making demand worse;
- immigration is gone for the foreseeable future;
- unemployment is immense and wages devastated;
- rising commodity prices no longer trickle down to incomes as they are either foreign-owned, poorly structured, poorly taxed, or overbuilt driving no new investment;
- the China “put” is gone outside of dirt;
- business investment is going to crater even more than yesterday’s capex report suggested given it does not include smashed education and health.
Australia is in deep trouble. The last thing we need is a deflationary currency shock to push production offshore and lower inflation expectations that defer spending even further and start to increase household’s debt burden.
The RBA must act urgently to:
- roll out Operation Twist to buy the long end of the bond curve in its QE operations;
- deploy negative interest rates in conjunction with APRA to prevent a mortgage blowoff;
- start explicit QE aimed at currency reserves.
The RBA does not exist to destroy Australian inflation but that is what it is doing by sitting around on its arse.