Is it possible that Donald Trump could have done Reserve Bank governor Lesetja Kganyago a favour?
Much has been said about the dramatic policy U-turn from the US Federal Reserve last week, prompting some traders to speculate that the next move in rates may even be lower rather than higher.
Considering that the Fed chair, Jay Powell, and his committee were as recently as December priming the market for two rate increases in 2019, suspicion will linger that he bowed to pressure from the US president, who in 2018 described the Fed hikes as “crazy” and expressed regret that he had appointed Powell.
While there has been no noticeable slowdown in the US economy — in fact Friday’s jobs report signalled it was still powering ahead, with hiring beating all forecasts —the Fed startled policy watchers last week by telling investors it was ready to pause rate hikes, and even left open the possibility of a cut. It seems like Powell hadn’t read the memo about good policy-making being by definition, boring.
Other than the attacks from Trump, what changed in six weeks? From promising further gradual increases late in 2018, last week it changed tack and said it “will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate”.
The election campaign has started in earnest and promises to be the most toxic yet. It looks like the Reserve Bank will be spared the dilemma of having to consider raising rates in the midst of that, which would have surely invited more political attacks.
The reasons given for the change, from trade wars between the US and China and the impending Brexit, were hardly convincing, not least because those risks were well known to the market long before last week’s policy meeting and should therefore have been incorporated into the Fed’s previous policy stance.
An alternative view is that Powell, who marks a year in the job this week, and his colleagues were spooked by the stock-market selloff in December when traders reacted rather badly to the impending end of cheap money, so they capitulated to support equities.
Similar to the debates here about how narrow or wide in their scope should policy makers be when they make rates decision, the Fed’s reaction did raise questions about whether policy makers should be governed by equity traders.
The immediate implications for SA have been rather positive, demonstrated by the almost 7% surge in the rand versus the dollar since the start of the year. Describing the rand as the best-performing currency in the world hasn’t been a regular occurrence in recent years.
The potential for rand weakness, though they spoke about volatility rather than directional moves, loomed large when the central bank decided to raise interest rates in November, in a move that some economists decried as a mistake. The good news is that the rand is now stronger than it was on that day, while oil prices have barely moved, not withstanding the increase in crude prices since the start of 2019.
At the time Kganyago and the rest of the monetary policy committee (MPC) were working on an assumption that monetary tightening in the US would move apace, while the European Central Bank, which has just ended its money printing, would follow suit. Since then the Fed has turned dovish, Italy has slipped into recession and Germany, the engine of the euro area, has wobbled.
Then there’s the prospect of a messy Brexit that could damage the economies of Britain and the remaining members of the EU.
So the Bank probably no longer believes that “monetary policies in some advanced economies will likely be tightening throughout the forecast period”, which was described as one of the key risks for local policy.
That should be supportive of the rand and boost optimism that inflation, which in December slowed to the midpoint of the Bank’s target range, will remain under control.
While the Bank would deny that it takes into account political noise about its mandate and its ownership when making policy decisions, MPC members will probably be relieved that international developments have conspired to put it out of the firing line.
The election campaign has started in earnest and promises to be the most toxic yet. It looks like the Reserve Bank will be spared the dilemma of having to consider raising rates in the midst of that, which would have surely invited more political attacks.
Whether it was Trump, or the financial markets that did it, we should be grateful that the Bank will probably play a less central role in the political theatre.
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