The RBA review has extended the deadline for submissions until Monday 7 November, so there is still time to submit if you have not done so already. Weight of numbers is not an irrelevant consideration to consultation processes such as these, so even if you think other people are making the same arguments, there is still value in adding your voice. If the review hears the same thing from a broad cross-section of submissions, it becomes harder to ignore. A reminder that submissions can be confidential.
The review panel will be fronting a CEDA event in Sydney on 24 November at a venue to be advised. It would not be surprising if the review drops its response to the consultation on its discussion paper in advance of this event or on the same day. Interestingly enough, Governor Lowe will be speaking to CEDA’s annual dinner in Melbourne two days before on 22 November at 18:00 AEDT on a topic TBC.
This week, the RBA raised the cash rate 25 basis points to 2.85%, its highest level since May 2013. The step-down in the pace of tightening from 50 to 25 basis points over the last two meetings may well foreshadow a similar move by the Fed, if not in November, then in December. The October Board minutes claimed that ‘Drawing out policy adjustments would also help to keep public attention focused for a longer period on the Board’s resolve to return inflation to target.’ Zac Gross questions the basis for this suggestion. Hedging against uncertainty is a sufficient argument for greater interest rate smoothing (an argument also made in the minutes) without bringing in odd behavioural considerations such as this. Not for the first time, the Board may be over-thinking its effect on sentiment.
The statement accompanying the decision foreshadowed the updated forecasts to be released in the November Statement on Monetary Policy on Friday. The RBA raised the inflation forecast and lowered the real GDP growth forecast. This is consistent with an economy being hit with supply shocks.
Australia’s Q3 CPI rose 1.8% over the quarter and 7.3% over the year, the strongest annual rate since 1990. Financial markets were expecting a more moderate 1.6% rise over the quarter. The trimmed mean, which captures the persistent component of inflation, rose 1.8% over the quarter and 6.1% over the year, stronger than the 1.5% q/q increase the market had expected and the 1.4% q/q I had forecast. Trimmed mean inflation recorded its strongest annual increase in the history of the series starting in the June quarter 2002.
US Q3 Output and NGDP Gaps
The US economy resumed its expansion in the third quarter, with a 2.6% annualised growth rate based on the advance release, following two consecutive quarterly contractions in the first half of the year. This gives an estimate for the Q3 output gap of 5.2% based on the Berger, Morley and Wong methodology, up only modestly from 5.1% in Q2, but still a new record high for their output gap series going back to the late 1960s:
The technical recession in the first half of the year is barely evident on this measure. The Q4 output gap is nowcast at 4%, which would represent a rapid and substantial narrowing and is consistent with the recent inversion in the US 3m/10-yr spread. Their model’s conditional forecast is for the output gap to all but close by Q1 2024.
The Mercatus NGDP gap, which measures aggregate demand relative to a level implied by long-run expectations on the part of professional forecasters, also rose modestly in Q3, from 5.2% to 5.5%:
Mercatus doesn’t have the US NGDP gap closing until Q3 2026:
US nominal GDP growth moderated from 8.5% in Q2 to 6.7% in Q3, a welcome sign that excess demand is easing. Scott Sumner argues on the basis of the August PCE figures that above-target inflation outcomes are entirely due to excess nominal GDP growth and therefore inflation is entirely a demand-side (which is to say, monetary policy) phenomenon. On the Hutchins Center Fiscal Impact Measure, US fiscal policy remains contractionary, although is becoming less so:
Scott Grannis notes that the moderation in M2 growth points to a peak in the inflation process. As he notes, ‘if the Fed had been paying attention to the slowdown in M2, they would have toned down their tightening 4-5 months ago. And of course, if they had been paying attention to M2 18 months ago, they would have begun raising rates long before it became painfully obvious that we had an inflation problem.’
US October non-farm payrolls
US October non-farm payrolls on Friday has us expecting a 244k gain in payrolls employment compared to a median expectation of 200k and a 263k gain in September. We have the unemployment rate holding steady at its lowest level since the late 1960s at 3.5% compared to a median expectation of 3.6%. We are therefore somewhat more upbeat on the labour market in October than the median market economist, despite expecting a moderation in the monthly pace of employment growth compared to September.
ICYMI
Spending, Taxes & Deficits: A Book of Charts by the Manhattan Institute’s Brian Riedl.
Jeremy Siegel: Why Stocks Will Remain Strong in the Long Run.
100 Years of Rising Corporate Concentration. It’s nothing new.
This week is the 10th anniversary of Gary Banks’ productivity ‘to do’ list. That would be a very good hook for an op-ed by someone.
Treasury Advice on the Reserve Bank (of NZ's) Proposed Scope of Remit Advice Information Release.
The Reserve Bank of India should not fight so hard for the rupee.
The Fiscal Effect of Immigration: Reducing Bias in Influential Estimates.
Memes and themes: