A Conversation with Former RBA Governor, Ian Macfarlane AC

22.05.2026

In this special edition of SB Talks, CEO Vincent O’Neill sits down with SB Investment Committee member and former RBA Governor Ian Macfarlane to explore the increasingly complex forces shaping markets and the global economy. Against a backdrop of elevated geopolitical tensions, stubborn inflation, and ongoing uncertainty around interest rates, global equity markets, particularly in the US, have continued to show remarkable resilience. Vincent and Ian unpack whether this strength reflects genuine economic fundamentals or the growing influence of optimism surrounding artificial intelligence and future productivity gains.

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Vincent: Welcome to SB Talks. Today is Tuesday, May 19th. My name is Vincent O’Neill, and I am joined by Stanford Brown Investment Committee member, Ian Macfarlane. Welcome, Ian.

Ian: Thank you very much, Vincent.

Vincent: Now, today, Ian will be joining us to discuss geopolitics, inflation, interest rates, and investment markets. Welcome to all our listeners. It’s been approximately six months since we last recorded. Obviously, significant geopolitical events have unfolded in the period since then. How has your outlook changed since the last time we spoke on the podcast?

Ian: It has changed, and it hasn’t changed. It’s best summed up by that French saying, ” Plus ça change, plus c’est la même chose.” The more it changes, the more it stays the same. Well, the big change in that six-month period is we’ve received a second big negative shock, and that has come from the American and Israeli bombardment of Iran which has had quite big effects. It’s led to the closing of the Strait of Hormuz, big restriction in world oil supplies, big increase to world oil price, and restrictions, on various industrial materials. Now that is a big event. The markets have had a reaction. And, and it has, it’s had an immediate effect on markets, as you would expect.

Vincent: Yeah. Well, how’s the markets played out this time?

Ian: Well, the interesting thing is, the share market, particularly in the US but around the world because they follow the US share market, fell quite a bit just as they did in the previous negative shock, which was the tariffs, of last year. This time the US share market fell, 500 basis points. Last time it was 1,000 basis points. That was a bit smaller than last time, but it had the same characteristic as last time in that it quickly recovered, and didn’t just recover, it then went on to set a new all-time high. So that the US share market, from its low point or very brief low point at the end of March has risen by 15.5%. Now, that’s 15.5% in one and a half months. That’s an awful lot.

Vincent: And, and as you said, it has a sense of déjà vu to it. We’ve sort of been here before. And, on our prior discussions on the podcast, you have particularly explored the area of the US share market and the concept of are we in bubble territory? Do you feel that we’re, I guess, encroaching back towards that?

Ian: Oh, well, I think I’ve already said that last time. But before I go on to answer that directly, I just want to make an observation, about the current economic discussion around the world. I don’t think there’s ever been a time, certainly not in my experience, where it has been dominated by what is happening in the US share market.

Vincent: It’s like the only show in town.

Ian: Yeah, it’s the only show in town. Now maybe it was like that in 1929. I don’t know. I wasn’t there. But I suspect it would’ve been confined to the US then, whereas now the whole world is discussing the US share market. Now I came across, this thought as I was sorting through a whole lot of old presentations that I had made when I was a governor and when I was, economic advisor to Goldman Sachs, working out which ones I should keep and which ones I should throw out. And in reading them, I noticed that I rarely mentioned the US share market. It, was there, but it played a very subsidiary role to other things. I was writing about, big things like the rise of China, the debt problems in Europe, banking failures, resource booms, iron ore prices, et cetera.

Vincent: Has the economic picture become to share market or US share market dominated?

Ian: I think it’s very unbalanced. Because it’s as though the discussion is predominantly around one country, which is the US, predominantly around one part of the US economy, which is the share market. In fact, predominantly around one part of the share market, which is the tech sector. And one could go even further and say predominantly around about half a dozen personalities. And so, this is very strange. This has never happened before, and this makes me very apprehensive. So yes, I do think it’s a bubble.

And I’m definitely not alone in that, in that a lot of other people think it is, including some people from the tech sector who think it is. But we all have to remember that it’s extremely difficult to pick the end of a bubble. No one can do it with any confidence. And secondly, they always go on longer than you think they should. Now the US share market in the year to mid-May, where we are now, is up 26%. The previous year, on that same basis, was up 13, and the year before was up 30. It’s hard to believe it can keep going on like this.

Another way of looking at it is since October 22, it’s more than doubled. So, it’s more than doubled in the space of three and a half years. Another way of looking is that over that period, its annual average increase has been 24% per annum. In an economy which measured in its widest sense, which is nominal GDP, in other words, including inflation, nominal GDP has gone up 6.7% per annum over that period, the share market’s gone up 24% per annum over that period.

So, these are the sort of things that make me feel that it is in bubble territory. And the other thing, of course, is the price earnings ratio, which is higher than it was in 1929. It’s only been higher once before, which was in the dot com bubble of 2000, and we know what happened after that. So for these reasons, I think it is. But it doesn’t mean I think it’s going to turn over next month or even in the next six months. I don’t know.

Vincent: The counterargument to anyone, anytime we’re in a bubble, is obviously the old, “This time it’s different.” And you’ve done well. We’ve made it. We’ve talked the US share market. We’ve talked technology dominance of that share market. But we haven’t yet mentioned the elephant in the room, AI.

Ian: It’s amazing I’ve gone on for so long and not mentioned AI. But that definitely is the elephant in the room, and it’s the confidence in that which has outweighed these various negative- factors It’s the pot of gold at the end of the rainbow, which has caused huge amounts of finance to flood in to the AI companies themselves to the chip manufacturers, to the data centre builders, to the energy suppliers,

Vincent: And the expectation that this will continue for several years, well, at least ahead in terms of the build out.

Ian: Well, I don’t know. I think the thing that it may or it may not. But the thing that drives it is the expectation that the, the winnings at the end will be huge, and they’ll be confined to one or two people, or one or two companies, which will have massive market power. And of course, that may happen or it may not happen. The thing that worries them most is, and they don’t worry much because they’re very confident people, but the thing that would worry them most if it turns out, as it appears to be, that AI is being built successfully and is being used, but instead of one or two companies monopolizing the market, there’s a competitive market with four or five, for example.

Vincent: More, like a commoditised market.

Ian: Well, it doesn’t have to be as far as being commoditised. It’s just like a streaming market is today, where, I use ChatGPT, you use Claude, someone down the road uses Gemini, someone else uses the Chinese version.

Vincent: So, you’ve got a reduction in your economic moat, and therefore your pricing power.

Ian: Yes. And so instead of getting this massive quasi-monopolistic return, you just get an ordinary competitive. You know, the thing that the tech industry in Silicon Valley dislike most is competition. They loathe competition. In fact Peter Thiel, who’s seems to be their main spokesman, says, ” Competition is for losers.” You’re not going to spend a lot of money investing in a competitive industry. You’ll do okay, but you won’t make a lot of money.

Vincent: So, the case you’re setting out there is, I guess, the market’s riding high on this huge investment case behind AI, and it’s dragging all sorts of other associated sectors and industry with it. What if the return on that investment isn’t what they might hope or expect?

Ian: Well, we don’t have to wait till the dust has finally settled. We just have to wait till we reach a point when some people start saying, uh, “I don’t think, one or two companies are going to monopolize this. I think we’re going to find a lot of people get in there.” It’s like a car company. There’s a lot of car companies. Everyone can get a good car. No one’s making a fortune out of car companies. As I said, no one’s making a fortune out of streaming anymore. At one stage, they thought Netflix was going to be one of the Magnificent Seven, and they worked out, no it’s not because it’s got all these other competitors. We all can use different streaming services if we want to watch something.

Vincent: Well, the value point moves to a different point of the curve. I’m conscious also not yet talked about the Fed and the Fed’s outlook, and they’ve very much been under the spotlight. I’m sure you would have a huge amount of empathy for Chair Powell and what he’s had to go through in, in recent months there.

Ian: Well, the other thing that’s changed apart from the Iran shock. The other thing that’s changed is the outlook for monetary policy. Until recently, everyone assumed, or not, not everyone, the markets assumed that the next move in monetary policy would be an-another easing, and the reason for that is because that was what was happening last year in 2025.

Vincent: And a fair dollop of commentary out of the White House talking up that.

Ian: Now I never thought there was a very strong case for the easing last year, and there’s certainly no case for it now. And the evidence, the best bit of evidence for this is Australia, where, cash rate’s been put up three times this year to exactly offset the three reductions last year, which make you wonder what was the point of the three reductions last year.

Now, in the US, it hasn’t reached that point yet, but it has reached a point where the market, instead of expecting the next move in interest rates to be a cut, is now expecting that, the next move is more likely to be a rise. And that is a very big change. And why has there been this change? Well, the answer’s very simple. It’s, inflation, well in the US, for example, inflation has been above the Fed’s target of 2% for some time, and recently it’s started to edge up quite a bit. For example, so in the 12 months to February, the CPI rose by 2.4%. In the 12 months to March, it was 3.3. In the 12 months to April, it was 3.8%. And downstream, where we look at producer prices, which is what businesses have to pay for their inputs, producer prices are up 6% in the 12 months to April. So, a, there’s more inflation in the system, and there’s more to and people are noticing this. I mean, in fact, in some ways the best indicator of inflationary expectations is the bond market.

Investors in bonds, there’s one thing investors in bonds hate, is the prospect of inflation, because that means automatic losses for them. And so, the bond yields around the world have been going up. In the US, the most recent tender by the Treasury for the long bond went off over 5% the first time since 2007. So inflation is definitely stirring, and inflationary expectations are definitely stirring.

Vincent: It has certainly caught the bond market’s attention, dare I say, potentially more than, than the share markets. We touched on it before, but what do you make, what about President Trump and his vocal calls for lower interest rates? He’s got his man.

Ian: He’s got his man in the Fed as chairman, a chairman of the board, and the more important thing is the chairman of a committee called the Open Market Committee, which is the one that sets interest rates. It’s 12 members of the Open Market Committee. But we still don’t really know what’s going to happen for two main reasons.

The first one is, Kevin Walsh may surprise people because historically he’s been a hard money man. He’s been very anti-inflationary. He was on the board of the Fed about a decade ago, and his voting record there was that he was, very dubious about some of the expansionary moves that were made by Bernanke when he was chairman. So that’s the first uncertainty. But the bigger uncertainty is the, Open Market Committee, as I said, has 12 members, and Walsh is one, and he’s the chairman, which is the most important, but can he convince the majority of the other 11 to come along with him if he wants to? He’s got a couple of problems there.

The first problem is that former Chairman Powell has decided to stay on. In previous chair people always resigned once they lost the chairmanship, but he’s stayed on for a number of good reasons, as a full voting member of the committee. Incidentally, I think history will treat Powell very favourably. I think he was I agree an honourable man doing an honest job under extreme provocation. But the second indicator that’s going to make it difficult for Walsh is that at the last meeting of the Open Market Committee, three of the voting members dissented. They didn’t say, at the meeting, decided to keep interest rates constant. They didn’t dissent in order to say, “No, you’re going to put them up, but they dissented to say that “In our communication with the public, we should stop in any way giving the indication that the next move might be down.”

Vincent: So that tells you that expectation management to public and markets.

Ian: Yeah, well, they’re saying, uh, stop doing that because obviously they feel, probably they feel that the next move is up and they shouldn’t be in any way indicating the contrary. So, I think you have to assume that Walsh will not be able to get his way. Well, we can’t even be sure now that he does want to do that, but if he does want to cut rates, he won’t get his way. There’s absolutely no case to cut rates in the US. Yeah. No other central bank in the world would consider cutting at a time when inflation is rising, it’s above the target, rising unemployment rates virtually at an all-time low, and financial markets are grossly overheated. There was absolutely no case.

Vincent: What is the case? None.

Ian: None. Well, at one stage, Walsh had to claim that there was a case.

Vincent: Back to the AI story.

Ian: Yes, and he said, “Oh, you see, AI will deliver these huge productivity benefits, and therefore we can cut interest rates.” Well, I think that’s even wrong economically, too. I think it’s the other way around. You’d have to wait for a decade to know whether it produced these productivity benefits. So, I think we’ve just got to assume that, interest rates in the US will stay the same, for the rest of the year.

Vincent: Well, I think if you’re going to run that AI productivity argument, it maybe had a slim chance before the conflict in the Middle East and that sort of compounded pressures. Now it’s sort of evaporated you would think.

Ian: Yeah. It was an argument I’d never heard used before in discussions for monetary policy. It’s a totally new one dragged out of left field, as they say.

Vincent: Well, the US administration has been particularly skilful at coming up with new methodologies in recent times, so you’ve got to admire their innovation, let’s say. Which kind of brings us back to where we started, I guess, in terms of the outlook.

Ian: Yeah, well that’s right. So, what I’m saying is that there’s been three big negatives over the last year or so, which you would think in normal circumstances would, put a significant dampener on the share market. The tariff events of last year, the Iran war, and the change in monetary policy outlook. But the share market just keeps charging on day by day. Plus ça change, plus c’est la même chose.

Vincent: If I may, obviously your primary focus is probably the US, for good reason. But we touched on Australia before, and you talked about the rate rises that we have seen this year sort of offsetting what happened last year. I guess putting that to one side, what, what’s your take on how we’re positioned here into the future?

Ian: Well, there’s not much of a story. It’s very hard to come up with an interesting story about Australia. We sort of chug along with a lacklustre growth to maybe a little less below, which is actually not all that different to the US, by the way, except ours is due to population, not to productivity.

Vincent: There isn’t productivity gains that we are we are scrambling for but cannot get.

Ian: I’m not even sure we’re scrambling for it. But anyhow, we’ve got low unemployment, very low unemployment. We’ve got rising inflation. And we’ve got a similar monetary policy outlook. But the very big difference is the US has got an absolute booming, of now I believe bubble-like stock market, and our stock market just creeps up. There’s not the amount of enthusiasm, in the investment community in Australia that there is in the US. Incidentally, in both countries, consumer confidence is extremely low by historical standards. So the enthusiasm in America is confined to the corporate sector, and in fact, I’d say it’s confined to part of the corporate sector. The rest of the economy is doing nothing much.

Vincent: No, I think in Australia we definitely have certain divides across our economy in some parts, you know, certainly feeling the impact of where interest rates are currently at in other parts.

Ian: But they they’re still not very high by historical standards. You’ve got to remember for someone my age, they still look low.

Vincent: I 100% agree, but you have to probably take interest rate times level of household debt, and that’s probably the consumer impact.

Ian: Yeah.

Vincent: And unfortunately, probably through the era of interest rates at an artificially low level, some households probably got overstretched, and that’s what we continue to probably work our way through.

Ian: Yes, well, we’re hoping to do something about that. We’ll see how that pans out.

Vincent: A very comprehensive, overview. Thank you, Ian, appreciate your insights, as I’m sure our listeners will, and thank you to all our listeners.

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