00:00Morning Lizzie. That's absolutely right. We have seen the central banks in Australia and New Zealand kind of turned very hawkish over the past couple of weeks.
00:09And that is because of two factors primarily. One is that growth has been pretty resilient. Consumer spending has been robust.
00:16The labor markets are pretty tight as well. It turns out much much tighter than central banks were expecting around even earlier this year.
00:26And there is also the inflation picture. The inflation picture is kind of sticky. Gone are the days when we seem to be comfortable talking about 2 percent inflation.
00:35Now we are talking about two and a half if not 3 percent inflation in many of the economies.
00:40And that's the reason why central banks are quickly pivoting away from dovishness into hawkishness.
00:47Now you and I both know no central banker likes to hit the reverse button and admit a policy error.
00:53Which major central bank then is most likely to surprise us in 2026 and why?
01:00Well I think that you know that award is to probably go to the Bank of Japan because they are behind the curve.
01:07If you look at their own projections for inflation they are forecasting inflation to come in at 1.8 percent for the next fiscal year.
01:15And that is never mind that realized inflation is running at 3 close to 3 percent in Japan and they are also expecting growth to be above trend next year as well.
01:26So if you put all those together in the Taylor rule equation what you get is a recommended rate of 1.5 percent.
01:34So that means that they have got 75 basis points of rate hikes that they need to put through.
01:40Whether they will put that through or not is the big question.
01:43But there is no question that they are behind the curve in kind of fighting the inflation.
01:48And there are also other central banks that are likely to turn more hawkish as well.
01:53Well let's talk about the Fed because the expectation then is of course that they might get a dovish Fed chair next.
01:59Why might that chair struggle to get the FOMC on board for deep rate cuts?
02:07Well the point is you know the Fed is at 350 to 375 now.
02:12And if you look at how sticky core inflation has been and how resilient the U.S. economy has been.
02:18We got the print yesterday 4.3 percent blowing out all estimates.
02:22So that and the Fed expects the economy the U.S. economy to go 2.3 percent next year.
02:28That's fully half a percentage point above what they were expecting in September.
02:33And 2.3 percent even that is conservative.
02:362.3 percent would be well above trend.
02:38So you've got an economy growing well above trend.
02:40You've got core PCE that is hovering close to 3 percent.
02:44That means that there is just no wiggle room for the Fed to be cutting rates.
02:48And for the new incumbent whoever they are they are required to be dovish by job description as we know.
02:55But the question is whether they will be able to drive that consensus and not all on the Fed policy committee may agree to cutting rates endlessly because of the factors that I mentioned of core PCE being sticky and resilient economic growth.
03:10Which means that the Taylor rule rate is is at 350.
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