The Economy: RBA, US Fed meet - rates and market turmoil in the crosshairs

The Economy: RBA, US Fed meet – rates and market turmoil in the crosshairs

Monday was another bloody day in Australia's equity markets but last night on Wall Street saw a rally, with rises on equity prices generally exceeding 2%. The relief is palpable, although there is more volatility to come.

Writing at the weekend, Henry’s advice for the board of the Reserve, meeting today, concludes as follows:

RBA governor Glenn Stevens has made it clear he is quite capable of delivering a rate hike in an election year, unlike (according to those who check these matters) all of his predecessors. Still, hiking a month or so before the election might be seen as unduly aggressive, biting hard the hands that appointed him.

So on balance readers should expect a rate hike to be announced tomorrow. The main caveat is that two more very bad nights on Wall Street would provide a valid reason to wait and see. This is because two more very bad nights would begin to suggest the possibility of a major change of direction for global markets, well beyond the “correction in a bull market” currently on the cards.

Having waited in August, the balance would have to swing again to allow a September hike and by October the election would be announced — precluding any monetary policy change — or be so close as to effectively preclude such action.

The market has been prepped, the governor is no doubt biased for action and biased against the tag of lacking ticker or consistency that might become his if he waits now and has to go later.

Expect a hike, and if there is no hike you will know that the Reserve is worried, perhaps very worried, about the global economy and its prospects.

Monday was another bloody day in Australia’s equity markets but last night on Wall Street saw a rally, with rises on equity prices generally exceeding 2%. The relief is palpable, although there is more volatility to come.

Henry’s Lex commented:

You capture the conundrum facing RBA and other central banks if market tips down sharply in a period of strong growth — at least Bernanke has an economy closer to a tipping point making his decision easier if it gets ugly…

Lex has been presenting the bear case for global equities and picked the correction pretty well.

We’ll know in 24 hours if the RBA has decided to stick with its pre-equity-correction game plan or if the ugly market moves have stayed its hand. And after that we shall get the US Fed’s reading, as that body meets on Tuesday night our time.

We’ll know by the time of the September board meeting if the August decisions (and words, in the case of the Fed who is unlikely to hike) created more problems for fragile markets or were reasonably appropriate.