Rates Spark: A frustrated Fed on liquidity watch

TRUMP: WE WANT 1% INFLATION — AND WE’RE GOING TO GET IT A LITTLE LOWER.

Members commenced their discussion of financial conditions by considering central bank policy settings in advanced economies. The US Federal Reserve (Fed) and the Bank of Canada (BoC) had both cut their official rate by 25 basis points at their October meetings, as expected, while the Reserve Bank of New Zealand (RBNZ) had cut its official rate by 50 basis points. Members noted that inflation remained above target in these economies. The BoC and RBNZ expected inflation to decline to their targets over the period ahead, given significant spare capacity in their economies. The Fed had responded to weaker labour market conditions, while noting that inflation was expected to moderate over time but with risks still tilted to the upside. In many advanced economies, market expectations were for policy rates to be cut further over the coming year as economic conditions weaken. However, policy rates were expected to be steady in Canada, where policy had already been eased significantly, and in the euro area, where the unemployment rate remained low and inflation was close to target. The Bank of Japan was expected to raise its policy rate further in response to persistent inflationary pressures, despite ongoing weak growth. Members noted that the Fed had announced in October that it would conclude its balance sheet runoff. This reflected a judgement that reserves were reaching ‘ample’ levels, given signs of pressure in a range of US money market rates. Sovereign bond yields had fallen noticeably in the United States, Canada and New Zealand over preceding months, as expectations for the future path of policy rates had declined. In the United States, market measures of short-term inflation compensation had also fallen, though longer term measures had remained relatively stable. Long-term government bond yields in Australia were little changed. RBA: It’s unclear if monetary policy is still restrictive, unlike the definitive signals in 2024. RBA: Australian dollar remains aligned with estimated fair value. RBA SAYS POLICY EASING COULD STILL OCCUR IF THE LABOR MARKET WEAKENS SIGNIFICANTLY OR GROWTH FALLS SHORT. ... RBA: CASH RATE COULD STAY AT PRESENT LEVEL IF ECONOMIC DEMAND RECOVERS FASTER THAN EXPECTED. ...