Take Note, FOMC

After trimmed mean consumer prices year-over-year growth of an underwhelming 1.7%, a central bank releases the following in its latest statement:

“While the quarterly data contain some temporary factors, these results, together with ongoing very subdued growth in labour costs and very low cost pressures elsewhere in the world, point to a lower outlook for inflation than previously forecast.”

Thanks for playing “Guess That Central Bank,” but it’s not the Federal Reserve (I guess maybe “labour” gave it away).  This is from today’s statement from the Reserve Bank of Australia (RBA)—a statement accompanying a move by the RBA to cut its policy rate by 25 basis points to 1.75%.  Meanwhile, the Fed, which is facing nearly identical conditions, is contemplating its next rate hike.

While Australia’s economy looked very similar to the U.S.’s in 2007, the RBA has proved itself an effective central bank and has kept nominal spending largely on trend: Australia vs US nominal gdp

Granted, most, if not all, of the RBA’s ability to accomplish this feat is thanks to the fact that it was further from the zero lower bound than the Fed when the global crisis hit.  However, that’s all the more reason for the Fed to avoid the risks of a(nother) premature hike.

The Fed should follow the RBA’s lead and reduce the its policy rate target range back to 0-25 basis points.

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