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BANK OF AMERICA points out global monetary policy is shifting from the ultra-loose level to some central banks - most notably Australia - beginning to tighten. None of the major central banks have hinted at hiking, but with a number of smaller banks moving people are asking: How soon do the major central banks follow suit and are the major central banks falling behind the curve? UNITED STATES LAGS
The Reserve Bank of Australia was the most noticeable country to hike interest rates, from 3% to 3,25%. Bank of America compares the Australian unemployment rate with that of the US to draw conclusions about when the US might tighten. If the US were to mimic Australia and hike rates to 3,25% when the unemployment rate drops below 6% that would take a number of years.
UNITED STATES LAGS
The Reserve Bank of Australia was the most noticeable country to hike interest rates, from 3% to 3,25%. Bank of America compares the Australian unemployment rate with that of the US to draw conclusions about when the US might tighten. If the US were to mimic Australia and hike rates to 3,25% when the unemployment rate drops below 6% that would take a number of years.
Low for long
Bank of America (BofA) says it's important to understand how US inflation behaves over the business cycle. BofA says inflation is a long lagging indicator. One of the great regularities of the business cycle is that core measures of inflation fall in the early years of economic recoveries. The reason for the drop is that spare capacity is very high coming out of a recession.
CAPACITY UNDERUTILISATION
The unprecedented level of capacity under-utilisation in the United States is one of the reasons why inflation will remain low - hence it will take a long time before the US Federal Reserve raises interest rates. Bank of America says many gauges of spare capacity are "off the charts". Industrial capacity utilisation is at its lowest level in 40 years.
EXPECTATIONS SIGNAL
Some signals in the market would seem to contradict a benign outlook for inflation in the US. Bank of America (BofA) notes the most significant of those is the surge in the gold price. BofA says a better gauge is the breakeven inflation rate between US treasuries and inflation-linked bonds, which shows investors believe in a 2% inflation rate over the long term.
