The RBA’s Troubling Inflation Targeting: Implications for the US Fed

The Reserve Bank of Australia (RBA) has long been admired for its effective inflation-targeting regime. However, recent policy decisions by RBA Governor Philip Lowe have raised questions about the bank’s commitment to inflation targeting and the potential implications for the US Federal Reserve. This article will explore the RBA’s recent policy decisions, their implications for the US Fed, and the potential consequences for the global economy.

RBA’s Inflation Targeting

The Reserve Bank of Australia adopted an inflation-targeting regime in 1993, managed skillfully by Ian Macfarlane from 1996 to 2006. Under the stewardship of Glenn Stevens from 2006 to 2016, the RBA also achieved many soft landings. However, since 2016, current RBA Governor Philip Lowe has allowed RBA policy to go off course in ways that are concerning to economists. Lowe has been slow to respond to resurgent inflation as nations scramble to reopen from the Covid-19 pandemic and now seems intent on driving the Australian economy into recession to bring inflation back into the 2-3% range.

Implications for the US Fed

The RBA’s failure to avoid overheating risks has been called a “horrendous error” by economist Stephen Koukoulas. This previews what other central banks, including the US Federal Reserve, may soon be dealing with. Like current Fed chief Jerome Powell, Lowe was slow to react to resurgent inflation. The message from Australia is that central banks may need to keep tapping the brakes more assertively than policymakers believe. Analyst Craig Erlam at OANDA notes that the debate at the RBA’s recent policy meeting “centered around whether there was a need to accelerate the hiking cycle,” which means the US Fed may need to keep rates higher for longer than expected.

Related Facts

• The RBA has been admired for its effective inflation-targeting regime since 1993.
• Current RBA Governor Philip Lowe has allowed the policy to go off course in ways that are concerning to economists.
• The RBA’s failure to avoid overheating risks has been called a “horrendous error” by economist Stephen Koukoulas.
• The message from Australia is that central banks may need to keep tapping the brakes more assertively than policymakers believe.
• Analyst Craig Erlam at OANDA notes that the debate at the RBA’s recent policy meeting “centered around whether there was a need to accelerate the hiking cycle.”

Key Takeaway

The Reserve Bank of Australia’s recent policy decisions and implications for the US Federal Reserve are concerning. The RBA’s failure to avoid overheating risks has been called a “horrendous error” by economist Stephen Koukoulas. The message from Australia is that central banks may need to keep tapping the brakes more assertively than policymakers believe. This could mean the US Fed needs to keep rates higher for longer than expected, which could seriously affect the global economy.

Conclusion

The Reserve Bank of Australia’s recent policy decisions has raised questions about the bank’s commitment to inflation targeting and the potential implications for the US Federal Reserve. The RBA’s failure to stay ahead of overheating risks has been called a “horrendous error” by economist Stephen Koukoulas. The message from Australia is that central banks may need to keep tapping the brakes more assertively than policymakers believe. This could mean the US Fed needs to keep rates higher for longer than expected, which could seriously affect the global economy.