A roaring economy continues to test the Federal Reserve’s fight to tame inflation, a year and a half into the central bank’s aggressive interest rate increases.
Economy
Fed leaves rates unchanged as officials debate economy’s path
Central bankers left rates unchanged Wednesday, as was widely expected. But they have yet to fully decide whether rates — already pushed to their highest levels in 22 years — should go even higher to root out abnormally high prices, curb consumer spending and bring growth to more sustainable levels.
“That’s the question we’re asking is, ‘Should we hike more?’” Chair Jerome H. Powell said after the Fed’s two-day policy meeting.
The major stock indexes rallied on Powell’s remarks, breathing a sigh of relief that additional rate increases aren’t certain. At the close, the Dow Jones Industrial Average rose 221.71 points, or 0.67 percent. The Nasdaq climbed 1.64 percent, and the S&P 500 index closed up 1.05 percent.
Faced with soaring inflation as economic growth boomeranged back from the coronavirus pandemic, the central bank sprinted to raise interest rates starting in March 2022. The Fed’s benchmark interest rate now falls between 5.25 and 5.5 percent, and officials have not ruled out an additional increase at their next meeting in December or even into 2024. The growing message instead is that rather than pushing up rates, Fed leaders will hold them at elevated levels for longer than they previously expected.
Those decisions will depend on what happens with inflation, economic activity and financial conditions. Bond yields, for example, have shot up in recent weeks, and some officials suggest that could effectively do the job of one more rate increase if sustained long enough. Fed leaders have had to contend with a barrage of other potential threats, including the Israel-Gaza war, the autoworkers strike and the prospect of another government shutdown.
But the overall picture seems unlikely to change: an economy that time and again has proved resilient despite high interest rates and inflation, wars abroad, and a smattering of other threats to the U.S. economy.
Jason Furman, a Harvard economist and former adviser to President Barack Obama, said the Fed is seeking a balance between patience and declaring “mission accomplished” too soon.
“I think they’ve made enough progress on inflation that they can afford to be patient,” Furman said. “I don’t think there’s a whole lot that would put a rate hike on the table in December. But if by the first half of next year, if inflation is running at a 3 or 3.5 percent pace and we’re still adding jobs, I think they’ll have to come back and do more.” (Typically, inflation runs at 2 percent annually.)
Powell said the Fed is not forecasting a recession, adding that “it would be hard to see how you would do that if you look at the activity we’ve seen recently.” He said the fact that the economy has not collapsed under the weight of high interest rates was a “historically unusual and very welcome result.”
Yet Powell stood by his opinion that some pain would be necessary to get inflation back to normal levels. What that looks like, though, no one knows.
“It is still likely to be true, not a certainty, but likely that we will need to see some slower growth and some softening in the labor market — in labor market conditions — to fully restore price stability,” Powell said.
Normally, steep rates would zap the economy or cause a recession, as people pull back on spending and businesses shed workers. But the 2023 economy is showing the opposite, buoyed by a tight labor market and the spending of consumers nationwide.
So far, robust spending, especially among wealthy Americans, has kept the economy humming far beyond expectations. Undeterred by high inflation, many households are buying concert tickets, fancy vacations and new vehicles. High costs for the basics — groceries, gas, rent — are still falling hard on lower-income families with less budget flexibility. But data released last week showed a fifth consecutive quarter of growth, with the economy expanding at an annualized rate of 4.9 percent from July to September, the strongest pace since 2021.
The job market hasn’t cratered, either. Powell pointed to signs of slowing such as fewer job openings and wages that are increasing at a more moderate pace. But the unemployment rate is still at a hot 3.8 percent, and employers have added jobs for 33 months straight.
Part of that surprise stems from the fact that households and businesses just aren’t responding to higher interest rates in typical ways. The housing market, for example, is supposed to be especially sensitive to interest rates, as high borrowing costs kick mortgage rates way up. The average for a 30-year fixed-rate mortgage is now 7.79 percent, up more than 1 percentage point in 2023, according to Freddie Mac.
But a downturn in the housing market didn’t last long, and home prices are again on the upswing. Prices rose 2.6 percent in August compared with the year before, according to data released Tuesday by the closely watched S&P CoreLogic Case-Shiller Home Price. Thirteen of the country’s 20 major metro markets also reported price increases in August compared with July.
“It really is a story of much stronger demand,” Powell said at the Economic Club on Oct. 19. “There may be some ways the economy is less affected by interest rates. It’s hard to know precisely.”
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VICTORIA – British Columbia is forecasting a record budget deficit and a rising debt of almost $129 billion less than two weeks before the start of a provincial election campaign where economic stability and future progress are expected to be major issues.
Finance Minister Katrine Conroy, who has announced her retirement and will not seek re-election in the Oct. 19 vote, said Tuesday her final budget update as minister predicts a deficit of $8.9 billion, up $1.1 billion from a forecast she made earlier this year.
Conroy said she acknowledges “challenges” facing B.C., including three consecutive deficit budgets, but expected improved economic growth where the province will start to “turn a corner.”
The $8.9 billion deficit forecast for 2024-2025 is followed by annual deficit projections of $6.7 billion and $6.1 billion in 2026-2027, Conroy said at a news conference outlining the government’s first quarterly financial update.
Conroy said lower corporate income tax and natural resource revenues and the increased cost of fighting wildfires have had some of the largest impacts on the budget.
“I want to acknowledge the economic uncertainties,” she said. “While global inflation is showing signs of easing and we’ve seen cuts to the Bank of Canada interest rates, we know that the challenges are not over.”
Conroy said wildfire response costs are expected to total $886 million this year, more than $650 million higher than originally forecast.
Corporate income tax revenue is forecast to be $638 million lower as a result of federal government updates and natural resource revenues are down $299 million due to lower prices for natural gas, lumber and electricity, she said.
Debt-servicing costs are also forecast to be $344 million higher due to the larger debt balance, the current interest rate and accelerated borrowing to ensure services and capital projects are maintained through the province’s election period, said Conroy.
B.C.’s economic growth is expected to strengthen over the next three years, but the timing of a return to a balanced budget will fall to another minister, said Conroy, who was addressing what likely would be her last news conference as Minister of Finance.
The election is expected to be called on Sept. 21, with the vote set for Oct. 19.
“While we are a strong province, people are facing challenges,” she said. “We have never shied away from taking those challenges head on, because we want to keep British Columbians secure and help them build good lives now and for the long term. With the investments we’re making and the actions we’re taking to support people and build a stronger economy, we’ve started to turn a corner.”
Premier David Eby said before the fiscal forecast was released Tuesday that the New Democrat government remains committed to providing services and supports for people in British Columbia and cuts are not on his agenda.
Eby said people have been hurt by high interest costs and the province is facing budget pressures connected to low resource prices, high wildfire costs and struggling global economies.
The premier said that now is not the time to reduce supports and services for people.
Last month’s year-end report for the 2023-2024 budget saw the province post a budget deficit of $5.035 billion, down from the previous forecast of $5.9 billion.
Eby said he expects government financial priorities to become a major issue during the upcoming election, with the NDP pledging to continue to fund services and the B.C. Conservatives looking to make cuts.
This report by The Canadian Press was first published Sept. 10, 2024.
Note to readers: This is a corrected story. A previous version said the debt would be going up to more than $129 billion. In fact, it will be almost $129 billion.
The Canadian Press. All rights reserved.
NANAIMO, B.C. – Former Bank of Canada governor Mark Carney says he’ll be advising the Liberal party to flip some the challenges posed by an increasingly divided and dangerous world into an economic opportunity for Canada.
But he won’t say what his specific advice will be on economic issues that are politically divisive in Canada, like the carbon tax.
He presented his vision for the Liberals’ economic policy at the party’s caucus retreat in Nanaimo, B.C. today, after he agreed to help the party prepare for the next election as chair of a Liberal task force on economic growth.
Carney has been touted as a possible leadership contender to replace Justin Trudeau, who has said he has tried to coax Carney into politics for years.
Carney says if the prime minister asks him to do something he will do it to the best of his ability, but won’t elaborate on whether the new adviser role could lead to him adding his name to a ballot in the next election.
Finance Minister Chrystia Freeland says she has been taking advice from Carney for years, and that his new position won’t infringe on her role.
This report by The Canadian Press was first published Sept. 10, 2024.
The Canadian Press. All rights reserved.
HALIFAX – The Nova Scotia government has introduced a bill that would kick-start the province’s offshore wind industry without federal approval.
Natural Resources Minister Tory Rushton says amendments within a new omnibus bill introduced today will help ensure Nova Scotia meets its goal of launching a first call for offshore wind bids next year.
The province wants to offer project licences by 2030 to develop a total of five gigawatts of power from offshore wind.
Rushton says normally the province would wait for the federal government to adopt legislation establishing a wind industry off Canada’s East Coast, but that process has been “progressing slowly.”
Federal legislation that would enable the development of offshore wind farms in Nova Scotia and Newfoundland and Labrador has passed through the first and second reading in the Senate, and is currently under consideration in committee.
Rushton says the Nova Scotia bill mirrors the federal legislation and would prevent the province’s offshore wind industry from being held up in Ottawa.
This report by The Canadian Press was first published Sept. 10, 2024.
The Canadian Press. All rights reserved.
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