fiscal and monetary policy now align

In the space of less than 24 hours, the two key narratives around the economy have shifted dramatically.

At 11.29am yesterday, expectations around monetary policy reflected that a burst of inflation was coming and either the Reserve Bank would look through it and stick to its plan to keep interests at near-zero until 2024, or that this burst of inflation was a harbinger of a resurgence of inflation around the world stoked by irresponsible central banks and profligate governments providing too much stimulus, and the only responsible course for the Reserve Bank was to expedite its tightening of monetary policy before too much damage was done.

Expectations around fiscal policy were a kind of photographic negative: the government was planning to significantly tighten fiscal policy, a course of action most economists worried would pull the rug out from under the strong recovery we’ve enjoyed so far. A few, ultra-hawkish types think governments have spent too much already and further fiscal stimulus is damaging (they point to the Biden administration as the worst example).