Inflation figures for the June quarter dominated recent economic discussion in Australia. Consensus market forecasts and those of the Reserve Bank had trimmed mean (i.e. underlying) inflation expected to come in at 3.8 per cent for the last few months. The Australian Bureau of Statistics figures, announced in late July, had underlying inflation at 3.6 per cent. At time of writing, this was widely interpreted among many commentators to be positive news, implying the Reserve Bank was unlikely to raise official interest rates at its upcoming mid-August meeting.

An alternative, arguably more persuasive take on the figures is as follows. First, economic forecasts are notoriously noisy and difficult. They should be taken with a large grain of salt. And the RBA has what could politely be deemed a “patchy” record of producing accurate economic forecasts. The correct touchstone by which to judge the 3.6 per cent inflation number is the RBA’s own 2.5 per cent target. It’s also worth noting that the figure ticked up from 3.5 to 3.6 per cent from the previous quarter.

Second, for a considerable period of the second quarter, the prospect of a deal to end hostilities in the Middle East seemed plausible. Those hopes seem more remote, although the situation is both volatile and fluid.

Although bond market prices imply a very low chance of an August hike by the RBA, they are still pricing in a 50 per cent chance of another rise in 2026 to put year end rates at 4.60 per cent.

At its last meeting the Reserve Bank of New Zealand raised official interest rates by 25 basis points to 2.50%. This was no surprise to markets. Inflation still is running at 3.1%, well above the midpoint of the RBNZ’s inflation target of 1-3%. Real interest rates – which is what matters for economic activity – are still negative at -0.6%. Arguably, monetary policy is still too expansive. It’s not surprising that markets are pricing in another 25bp rise in official rates later this year.

The was reinforced by the RBNZ’s own language: “With inflation still above target and economic activity expected to strengthen, some further reduction in monetary stimulus is likely to be required to return inflation to the 2 percent target mid-point.”

Meanwhile, the US Federal Reserve kept the Fed Funds rate on hold at 3.5 to 3.75 per cent (the Fed targets a window rather than a single figure for US official rates.) This was in many ways surprising given new Fed Chair Kevin Warsh’s long-standing reputation as an inflation hawk.

Throughout his career, Chair of the Federal Reserve Kevin Warsh has generally favoured tighter monetary policy. He called higher rates shortly after the Global Financial Crisis, became a prominent critic of quantitative easing (despite voting for the first two phases) and warned during the pandemic that the Fed risked falling behind inflation if it waited too long to act.

However, Warsh’s position is complicated by the fact that he was nominated by President Donald Trump who favours lower rates and think existing levels are already too high. That puts Warsh in something of a bind—although he technically cannot be removed by the President. It’s worth noting that factors beyond pure economics may be at play. For instance, Warsh’s father-in-law is Ron Lauder, a billionaire who has been friends with Trump since they overlapped at the Wharton School at the University of Pennsylvania in the 1960s.

Former New York Fed Chair Bill Dudley has argued Warsh may be pursuing a different approach by allowing long-term bond yields rise as a way of increasing rates without the Fed having to do so explicitly. Dudley cautioned that if markets become uncertain about how the Fed will respond to economic developments, monetary policy becomes less effective. This can increase the risk of mismatches between market expectations of Fed actions, while also slowing the adjustment of financial conditions to future policy changes.

This matters not only for the US, but CA ANZ members operating in economies around the world. One channel for this is simply the size of the US economy at US$30 trillion of annual output. To some extent, as goes America, so goes the world.

On top of this, global bond markets are interconnected. After Warsh’s press conference not only did 30-year US bond yields shoot up to their highest level since 2007, but Australian 10-year yields moved above 5 per cent—a level rarely seen in the last 15 years. New Zealand 10-year bonds moved up about 10 basis points, though they have been higher earlier this year.

This will likely propagate through credit markets at most maturities, pushing up borrowing costs for Australian and New Zealand businesses both large and small.

All eyes will be on the Fed when it meets after the November midterm elections when there may be less political pressure on Warsh not to raise rates.