Hope for a gentle landing in 2025
CONWAY GITTENS: Where do you see positivity or where do you feel the most hopeful regarding the economy?
JOHN WOODS: In terms of the economy, the pivotal question is whether we might achieve a Goldilocks soft landing. A year back, we had some worries. Reflecting on the start of 2023, many of us anticipated a recession by the close of ’23. Yet here we stand in September 2024, without a recession. In fact, the chances of a recession have been diminishing, which is fantastic news.
The prospect of lowering rates without a significant increase in unemployment now seems quite feasible. A year to a year and a half ago, that would have seemed improbable. So, I’m pleased to assert that a soft landing remains a viable option as the Fed decreases rates.
If we can reduce rates without observing a notable rise in unemployment while keeping inflation in check, that would be a victory for everyone involved. The Fed’s dual mission is to maintain price stability and full employment. Achieving both would be a favorable outcome as we approach 2025.
It’s additionally reassuring to witness a more typical yield curve, with the two-year rate approximately 20 basis points lower than the 10-year rate. This indicates a more stable growth landscape, which is something I eagerly anticipate as we transition into 2025.
Managing interest rates and employment
CONWAY GITTENS: How do you perceive the correlation between interest rates and unemployment evolving as we progress?
JOHN WOODS: The relationship between interest rates and unemployment is always sensitive. In Australia, similar to the US, the Reserve Bank has been navigating a fine line, attempting to reduce inflation without triggering a surge in unemployment. Traditionally, when central banks increase rates to tackle inflation, it often decelerates economic activity, potentially leading to job losses. However, what we observe now is somewhat different.
Presently, the RBA has managed to elevate rates to check inflation while keeping unemployment fairly stable. This is a positive indicator. The labor market has demonstrated resilience, and companies have been able to manage some cost pressures without embarking on extensive layoffs. This resilience is a crucial reason for our continued optimism about a soft landing.
Looking forward, if the RBA can begin to lower rates without experiencing a significant rise in unemployment, it would constitute a significant achievement for Australia’s economy. The key challenge will lie in preventing inflation from re-emerging as rates decrease. However, with inflation already showing signs of easing, there’s optimism that we can navigate this shift successfully.
Another element to consider is wage growth. In Australia, wage increases have been relatively modest compared to inflation, thus aiding in keeping unemployment steady. Should wage growth accelerate too rapidly, it could exert upward pressure on inflation, prompting the RBA to maintain elevated rates for a longer period. Yet, at this moment, the equilibrium appears to be intact.
It’s also crucial to recognize that the housing market is a significant factor in this scenario. Rising interest rates have tempered the property market, but if rates decrease too quickly, we might witness a revival in housing demand, complicating the inflation landscape. Hence, it’s a balancing act, one that the RBA seems to be handling well so far.
