‘Fireside chat’ with RBA Governor raises more questions

It was all very comfy with the audience full of suits who know that they will never have to be one of those who will lose their job due to the RBA believing we need 4.5% or more of the labour force without a job so we have inflation below 3%.

She was asked about the current state of the economy, specifically the unemployment rate hitting 4.5%, which was above the RBA’s forecast peak for the next 2 years of 4.3%. She told the room

“Monthly numbers can be volatile. The jump up in the unemployment rate was a bit of a surprise. But monthly numbers can be volatile, and we do know sometimes that they jump up and then they jump back down again.”

She is right, it can be volatile, but it is clear the path the unemployment rate is on, so suggesting the 4.5% is just a blip is a bit off:

But after telling the audience that she and many central bankers around the world were confused why the markets were so “sanguine” given everything going on (which was code for Donald Trump) she then wheeled out her own sanguine views on unemployment.

She suggested “We always thought it would drift up a bit. Maybe it’s drifted up a bit further than we thought. But it’s not a huge amount out. So, I think we just have to wait for a bit more data.”

And then she tried to gee up the room by arguing “but let’s be positive, inflation is back in the band – it’s not down at the midpoint where we’re supposed to be aiming but it’s still in the band – and the unemployment rate is still pretty low compared to where it was pre-COVID so still think we’re in a pretty good position.”

And sure, compared to 2019 we’re are doing well. But in 2019 the RBA was cut rate 3 times down to 0.75% because all the talk was about a recession (people really do forget just how crap the economy was before the pandemic).

Later when asked by a journalist about unemployment she calmly replied that “there are still jobs being created, just not as many” Again, this is what happens when unemployment rises, so not sure why she thinks this is great, given the only time jobs actually fall is during a recession.

She then suggested that this rise in unemployment “is bringing the labour back more to balance” and that the RBA wants to “keep the unemployment rates as low as we can without fuelling inflation. How close are we to that? We think we’re close-ish but it’s very uncertain and so we have to be prepared to consider different possibilities and if we’re wrong on that we have to be prepared to change our mind and we would.”

Just what this means though is unlcear. Does she think the RBA is wrong that unemployment is too high or too low?

My gut feeling is that she thinks we could do with a bit more unemployment (even though she said the RBA “are not aiming for an unemployment rate”) because she kept saying that “our judgement is there is still a little bit of tightness in the labour market”. What does that mean? It means they think too many people are employed and it is causing wages to rise faster than the RBA wants.

She also suggested that she thinks the current cash rate is “still a little bit restrictive” which means that it is still slowing the economy and causing unemployment to rise.

All of which suggests the RBA is comfortable with unemployment continuing to rise and truly has no worries that we are well above 4% unemployment now.

The RBA never wanted unemployment of 4% or lower. It never considered that “full employment”. It has devoted all its might to ensuring the hope of establishing 4% as a ceiling of unemployment was absolutely dashed.

And they are very comfortable telling a room full of people comfortably employed that.