Liam Dann: Monetary policy an antidote to Trump political circus

Federal Reserve Chair Jerome Powell kept the US market calm this week, despite Trump's political circus elsewhere. Photo / AP

NBA wild man Dennis Rodman didn't show up, there were no iconic photos that looked like renaissance paintings and no scraps with Robert De Niro going on in the background. In fact the US Federal Reserve's interest rate decision this week was, unlike the G7 summit and Donald Trump's Singapore circus, an oasis of sanity.

In terms of impact on all our lives it was also probably a bigger deal.

So if you need an antidote to the madness of world news this week, read on. Let global monetary policy be your Valium or Xanax, or whatever they are calling it these days.

What happened – and why was it so reassuring?

To put it in plain English - as US Fed chairman Jerome Powell made a point of doing – the US economy is in good shape and it appears to be getting better and unemployment and inflation are low.

After the Trump tweets and meaningless diplomatic-speak, plain English was a great start.

Powell seemed to be following the lead of Reserve Bank Governor Adrian Orr with his new communications strategy.

He warned the assembled financial journalists he would get to the detailed stuff but he was going to start jargon free, "because monetary policy affects all of us".

Powell might have been appointed by Trump but any fears he'd be Trump-like were laid to rest by his clear and deliberate messaging.

Powell announced plans to hold press conferences after every meeting and he said his mission was to ensure markets had clear signals about the Fed's direction and processes.

His clarity must have reassured markets because the news itself had the potential to hurt them.

The Fed lifted its official cash rate to 2 per cent. It also indicated it will raise rates two more times before the end of the year and lifted its longer term outlook for rate rises.

This was what economists call a hawkish stance. It leaned more heavily towards keeping inflation in check with higher rates, rather than stimulating additional economic growth by holding rates low.

Based on what we saw in February this could have sparked a market meltdown.

That's because as rates rise so do returns on safer investments, such as bank deposits. They start to look more attractive compared to a stock market that many see as overvalued.

Money starts to flow away from equity markets. If people think that trend is about to accelerate it can start a panicked sell-off

It didn't, though. Reaction on Wall Street was muted.

Shares closed down slightly but without panic. US 10-year Treasury yields - the benchmark for market thinking on rates - stayed below three per cent.

Even currency markets were calm.

The unusual bit for New Zealand is for the first time in nearly 20 years the US official cash rate is higher than it is here.

The Reserve Bank's official cash rate is 1.75 per cent and expected to stay there until at least the middle of next year.

The US Fed see their rates going to 3.1 per cent by the end of 2019 - so two more hikes this year and at least another two likely next year.

Based on the orthodox economic thinking, that ought to be driving the value of the kiwi dollar down relative to the greenback.

Perhaps the rate dynamic for currencies is still in effect and we might otherwise be trading at more like US80c.

But the kiwi held firm above US70c, where it has hovered for the last couple of months, just above its average level across the past three years.

The NZX-50 hit another record high.

For all the risk, all the chaos and all the craziness of politics, financial markets seem almost reactionary in their determination to keep calm and carry on.

Who knows how long this can last but it is certainly a pocket of good news.

We are now well into the process of returning normal economic settings.

We're a decade on from the global financial crisis measures like quantitative easing were designed to deal with.

Even the European Central Bank was talking about easing up on the quantitative easing last week.

A couple of years ago as we contemplated going through this process it was hard not to feel pessimistic about the ability of the global economy to cope.

We're not there yet. Big structural concerns about trade, debt, productivity and inequality remain. But so far the rebalancing process is all going to plan - touch wood.

That presents households with an opportunity to deal with debt levels in a measured way as rates follow an orderly and predictable path higher.

It presents businesses with a chance to act strategically: to invest, expand or even restructure, to future proof themselves ahead of the next economic cycle.

It also presents our Government with a window of opportunity to finish its reviews, forums and working groups - to get policy in place and rebuild some momentum in the economy.

It is easy - and probably reasonable - to feel anxious about the state of the world if you follow the headline grabbing political news.

But you can take heart that so far, financial markets are not taking it to theirs.