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The Federal Reserve kicked off a tightening campaign that’s set to be the most aggressive in decades, as Chair Jerome Powell assured Americans that the economy won’t tip into recession.
After raising interest rates by a quarter point and signaling six more increases this year, Powell told reporters that inflation is too high, the labor market is over-heated and price stability is a “pre-condition” for the U.S central bank as it tackles the hottest price pressures in 40 years.
“As I looked around the table at today’s meeting, I saw a committee that’s acutely aware of the need to return the economy to price stability and determined to use our tools to do exactly that,” Powell told reporters Wednesday following a two-day meeting of the Federal Open Market Committee. “The American economy is very strong and well positioned to handle tighter monetary policy.”
Policy makers voted 8-1 to lift their key rate to a target range of 0.25% to 0.5% after two years of holding borrowing costs near zero to insulate the economy from the pandemic. They forecast a sequence of rate hikes, finishing this year at 1.9% and then to about 2.8% by the end of 2023, which would be considered restrictive to growth.
Seven policy makers want an even faster pace of increases this year, which raises the prospect of a half-point move in future. Indeed, St. Louis Fed President James Bullard dissented at this meeting in favor of such an step.
“The Fed has now waged a war on inflation,” said Diane Swonk, chief economist at Grant Thornton. “They want to bring inflation down with the most aggressive surge in rates in decades.”
The Fed said that Russia’s invasion of Ukraine had had “highly uncertain” implications for the U.S. economy that create near-term upward pressure on inflation while weighing on economic activity.
U.S. central bankers face the arduous task of securing a soft landing for the world’s largest economy, a very rare outcome. Tighten too slowly and it risks allowing inflation to run out of control, requiring even tougher action. Shift too quickly and the central bank could roil markets and tip the economy into recession. Complicating the job: The war has sent the cost of fuel, food and metals racing even higher, raising fears of 1970s-style stagflation by posing threats to prices, growth and financial-market stability.
What Bloomberg Economics Says…
“FOMC participants have backed up Chair Powell’s hawkish words. They are serious about controlling inflation, and are willing to hike rates faster and higher than previously expected.”
— Anna Wong, Andrew Husby and Eliza Winger (economists)
— To read more, click here
Still, Powell played down the risk of recession and repeatedly stressed that the U.S. economy is “very strong” while emphasizing the need for price stability.
“They saw the light,” said Stephen Stanley, chief economist at Amherst Pierpont Securities LLC. “They have been underestimating the persistence and intensity of inflation pressures for at least a year. They have finally realized they have a serious problem on their hands and have to act. There is a whatever-it-takes kind of mentality” now.
The U.S. economy roared into the first quarter with employers adding more than 1 million jobs in the first two months and job openings near a record high. Strong demand sustained price increases and consumer inflation rose by 7.9% for the 12 months through February. The Fed’s 2% inflation target is based on a separate gauge, the personal consumption expenditures price index, which rose 6.1% in January.
Powell and his colleagues have pivoted rapidly from the gradualism of just three quarter-point hikes they penciled in for 2022 when they met in December to seven now, including Wednesday’s increase. The aggressive swerve is punctuated the risk of losing a grip on price increases now, which would require higher costs to the economy later to get it back under control.
For more than two decades, Fed officials have locked down inflation to around 2%, cementing public expectations that price volatility was no longer an issue for economic decisions. Achieving that required a punishing recession engineered by former Chairman Paul Volcker who pushed borrowing costs into the double digits. This year, Fed officials forecast that pandemic supply-chain problems would subside, and they still do, but Wednesday’s statement noted that price pressures are spreading beyond the logistics knots at a time of wage increases.
Now they are betting that a policy tilt toward a series of steady increases will keep inflation expectations anchored. But the risk is that the war in Ukraine, which has sent energy and commodity costs soaring, delivers another impetus to price pressures even while the U.S. jobs market remains too tight.
Powell was clear that if inflation doesn’t calm down, the policy committee will hammer it even harder.
Notwithstanding the projected rate increases, the Fed’s forecasts show very little increase in unemployment, which stays around 3.5% for the next three years. Economists said that sort of happy outcome rarely happens in real life.
“The history of being able to guide inflation down from 40-year highs with maximum employment suggests a smooth landing is very difficult to achieve,” said Matthew Luzzetti, chief U.S. economist at Deutsche Bank Securities Inc. “At some point they will face the tradeoff between pushing unemployment higher or accepting higher inflation.”
Despite the rosy outlook for the labor market in the forecasts, Powell made clear that it is running too hot in his view.
“There is misalignment of demand and supply, particularly in the labor market, and that is leading to wages that are moving up that are not consistent with 2% inflation over time,” Powell said. He said job openings near record highs point to a labor market that is “tight to an unhealthy level.”
“That is a pretty extreme thing to say,” said Derek Tang, an economist at LH Meyer/Monetary Policy Analytics. “That is saying too many people have jobs and people are getting wages that are too frequent. He is really putting his thumb down on the scale now.”
OTTAWA – Bank of Canada governor Tiff Macklem says there is a lot of uncertainty around how artificial intelligence could affect the economy moving forward, including the labour market and price growth.
In a speech in Toronto at the Economics of Artificial Intelligence Conference, the governor said Friday that the central bank is approaching the issue cautiously to get a better understanding of how AI could affect its job of keeping inflation low and stable.
“Be wary of anyone who claims to know where AI will take us. There is too much uncertainty to be confident,” Macklem said in prepared remarks.
“We don’t know how quickly AI will continue to advance. And we don’t know the timing and extent of its economic and social impacts.”
The governor said AI has the potential of increasing labour productivity, which would raise living standards and grow the economy without boosting inflation.
In the short-term, he said investment in AI is adding to demand and could be inflationary.
However, Macklem also highlighted more pessimistic scenarios, where AI could destroy more jobs than it creates or lead to less competition rather than more.
The governor called on academics and businesses to work together to shed more light on the potential effects of AI on the economy.
“When you enter a dark room, you don’t go charging in. You cautiously feel your way around. And you try to find the light switch. That is what we are doing. What we central bankers need is more light,” he said.
This report by The Canadian Press was first published Sept. 20, 2024.
Almost seven years since news broke of an alleged conspiracy to fix the price of packaged bread across Canada, the saga isn’t over: the Competition Bureau continues to investigate the companies that may have been involved, and two class-action lawsuits continue to work their way through the courts.
Here’s a timeline of key events in the bread price-fixing case.
Oct. 31, 2017: The Competition Bureau says it’s investigating allegations of bread price-fixing and that it was granted search warrants in the case. Several grocers confirm they are co-operating in the probe.
Dec. 19, 2017: Loblaw and George Weston say they participated in an “industry-wide price-fixing arrangement” to raise the price of packaged bread. The companies say they have been co-operating in the Competition Bureau’s investigation since March 2015, when they self-reported to the bureau upon discovering anti-competitive behaviour, and are receiving immunity from prosecution. They announce they are offering $25 gift cards to customers amid the ongoing investigation into alleged bread price-fixing.
Jan. 31, 2018: In court documents, the Competition Bureau says at least $1.50 was added to the price of a loaf of bread between about 2001 and 2016.
Dec. 20, 2019: A class-action lawsuit in a Quebec court against multiple grocers and food companies is certified against a number of companies allegedly involved in bread price-fixing, including Loblaw, George Weston, Metro, Sobeys, Walmart Canada, Canada Bread and Giant Tiger (which have all denied involvement, except for Loblaw and George Weston, which later settled with the plaintiffs).
Dec. 31, 2021: A class-action lawsuit in an Ontario court covering all Canadian residents except those in Quebec who bought packaged bread from a company named in the suit is certified against roughly the same group of companies.
June 21, 2023: Bakery giant Canada Bread Co. is fined $50 million after pleading guilty to four counts of price-fixing under the Competition Act as part of the Competition Bureau’s ongoing investigation.
Oct. 25 2023: Canada Bread files a statement of defence in the Ontario class action denying participating in the alleged conspiracy and saying any anti-competitive behaviour it participated in was at the direction and to the benefit of its then-majority owner Maple Leaf Foods, which is not a defendant in the case (neither is its current owner Grupo Bimbo). Maple Leaf calls Canada Bread’s accusations “baseless.”
Dec. 20, 2023: Metro files new documents in the Ontario class action accusing Loblaw and its parent company George Weston of conspiring to implicate it in the alleged scheme, denying involvement. Sobeys has made a similar claim. The two companies deny the allegations.
July 25, 2024: Loblaw and George Weston say they agreed to pay a combined $500 million to settle both the Ontario and Quebec class-action lawsuits. Loblaw’s share of the settlement includes a $96-million credit for the gift cards it gave out years earlier.
Sept. 12, 2024: Canada Bread files new documents in Ontario court as part of the class action, claiming Maple Leaf used it as a “shield” to avoid liability in the alleged scheme. Maple Leaf was a majority shareholder of Canada Bread until 2014, and the company claims it’s liable for any price-fixing activity. Maple Leaf refutes the claims.
This report by The Canadian Press was first published Sept. 19, 2024.
Companies in this story: (TSX:L, TSX:MFI, TSX:MRU, TSX:EMP.A, TSX:WN)
TORONTO – Canada’s main stock index was up more than 250 points in late-morning trading, led by strength in the base metal and technology sectors, while U.S. stock markets also charged higher.
The S&P/TSX composite index was up 254.62 points at 23,847.22.
In New York, the Dow Jones industrial average was up 432.77 points at 41,935.87. The S&P 500 index was up 96.38 points at 5,714.64, while the Nasdaq composite was up 486.12 points at 18,059.42.
The Canadian dollar traded for 73.68 cents US compared with 73.58 cents US on Thursday.
The November crude oil contract was up 89 cents at US$70.77 per barrel and the October natural gas contract was down a penny at US2.27 per mmBTU.
The December gold contract was up US$9.40 at US$2,608.00 an ounce and the December copper contract was up four cents at US$4.33 a pound.
This report by The Canadian Press was first published Sept. 19, 2024.
