RBNZ and Fed: Pausing for effect

Next month, the Fed is probably going to join the BoC and the RBNZ in skipping a rate hike. In this post, I look at the similarities and differences -- and find the Fed's approach more compelling.

Last week, in a note for Aurora Macro Strategies, I argued that the Fed’s rhetoric has probably shifted toward a pause next month — a reprieve (temporary or permanent) from the relentless hiking pace of the past 15 months. If this materializes, the Fed will join two other prominent “pausers”— the Bank of Canada (BoC) and the Reserve Bank of New Zealand (RBNZ). In this post, I look at what happened to the RBNZ — and what it means for Fed policy over the rest of the quarter.

The Monetary Policy Frontier

It is often said that if you wish to know the future of monetary policy, all you have to do is go to New Zealand.¹ The island nation not only gave us Bill Phillips (of “Phillips Curve” fame) but also pioneered a modern form of central bank independence with the Reserve Bank of New Zealand (RBNZ) Act 1989. More recently in 2021, the RBNZ’s mandate was amended to force it to consider the government’s objective of house price sustainability in setting monetary policy— to the best of my knowledge, the first time a major central bank has been asked to do so.²

In this hiking cycle too, the RBNZ has led the charge. It halted quantitative easing (QE) in July 2021— at a time when the Fed was only starting to “talk about talking about” tapering, with my apologies for recalling that awful phrase. It then hiked rates in October 2021, roughly six months before the Fed and nine months before the European Central Bank (ECB). Since then, it has hiked by more than any other G-10 central bank for a total of 525 basis points. (for those keeping score, the Fed has hiked by 500, the Bank of Canada by 425, and the ECB by 375)³.

Te Pūtea Matua/Reserve Bank of New Zealand burning the midnight oil; CC1.0 via WikiMedia/Clilly4

And then last week, out of the blue, the RBNZ decided to pause rate hikes. This took the markets (and me) by surprise for multiple reasons; all of which are instructive as we try to divine the Fed’s next move. First, the RBNZ paused even though domestic inflation has continued to rise. Second, it did so not by “skipping” a hike, but by hiking by 25bps and then producing projections that suggested rates would remain at this level for a period of time. And third, for the first time this cycle, the RBNZ acted not by consensus but by a 5-2 vote. Below, I look at these in turn and examine what they mean for future Fed policy.