The Fed has been buying US$120 billion a month in mortgage and Treasury bonds to try to hold down longer-term loan rates to spur borrowing and spending. Powell’s comments indicate the Fed will likely announce a reduction — or a “tapering” — of those purchases sometime in the final three months of this year.
Powell stressed that the Fed’s tapering of its bond purchases does not signal that it plans soon to start raising its benchmark short-term rate, which it’s kept near zero since the pandemic tore through the economy in March 2020. Rate hikes won’t likely begin until the Fed has finished winding down its bond purchases, which might not occur until mid-2022. Powell said the Fed would need to see much further economic improvement before it would begin raising its key rate, which influences many consumer and business loans.
In his remarks, Powell further underscored his view that much of the current spike in inflation is temporary. He warned that history shows that raising rates too soon, in response to temporary price increases, can weaken hiring and hurt the unemployed.
Such comments bolstered the notion that the Fed is still a long way off from raising its benchmark short-term rate.
“If anything this was a calming speech,” said Brian Bethune, an economist at Boston College. “There’s nothing here in the short run that will stampede interest rates higher.”
Over time, the end of the Fed’s bond-buying could put upward pressure on borrowing costs for mortgages, credit cards, and business loans. As Powell spoke Friday, though, the yield on the 10-year Treasury note, which closely influences the 30-year mortgage rate, declined to 1.32% from 1.34% Thursday.
Stock investors, too, appeared to welcome Powell’s message of a gradual withdrawal of the Fed’s economic support and his view that surging inflation pressures will likely prove temporary. The Dow Jones Industrial Average rose a sharp 250 points, or 0.7%, a few hours after the Fed chair spoke.
“Markets appreciate that there is a different test for raising rates than there is for tapering, and any communications on tapering don’t have any direct effect on raising rates,” said Steve Friedman, an economist at asset manager MacKay Shields and a former senior staffer at the New York Fed.
That marks a sharp contrast with 2013, when Ben Bernanke, then the Fed chair, triggered what came to be known as the “taper tantrum” by unexpectedly suggesting that the Fed would soon reduce its bond purchases — a remark that sent longer-term rates spiking. The jump in rates occurred partly because investors thought the beginning of a taper meant that rate hikes were close behind, which turned out not to be true.
On Friday, Powell said inflation has risen enough to meet the test of “substantial further progress” toward the Fed’s goal of 2% annual inflation over time, which was necessary to begin tapering. There has also been “clear progress,” he said, toward the Fed’s goal of maximum employment. He spoke via webcast to the Jackson Hole Economic Symposium, which is being held virtually for a second straight year because of Covid-19.
But Powell suggested that while inflation has surged, causing difficulties for millions of Americans, the price acceleration should ease once the economy further normalizes from the pandemic and supply shortages abate.
If the Fed were to reduce its stimulus “in response to factors that turn out to be temporary,” the Fed chair cautioned, “the ill-timed policy move unnecessarily slows hiring and other economic activity and pushes inflation lower than desired.”
Powell also noted that while average wages have risen, they haven’t increased enough to raise fears of a “wage-price spiral,” as occurred during the ultra-high-inflation 1970s.
“Today,” he said, “we see little evidence of wage increases that might threaten excessive inflation.”
If anything, Powell said, the factors that helped keep inflation super-low for years before the pandemic — the growth of online retail, lower-cost goods from overseas, slowing population growth — could re-emerge as the pandemic fades.
Yet Powell’s comments served to underscore what looks like a divide on the Fed’s policymaking committee between himself, along with other officials such as Fed Governor Lael Brainard, who favor patience in reversing the low-rate policies, and other policymakers who are pushing for a taper to begin soon so that a rate hike could quickly follow, if needed.
“Let’s start the taper, and let’s do it quickly,” Raphael Bostic, president of the Federal Reserve Bank of Atlanta, said early Friday on CNBC before Powell’s speech. Bostic said he expects the central bank to raise rates in late 2022 — earlier than the average among all Fed policymakers, who project the first rate hike in mid-2023.
A sharp jump in inflation has put the Fed’s ultra-low-rate policies under growing scrutiny, both in Congress and among ordinary households that are being squeezed by surging prices for items ranging from food and hotel stays to new and used vehicles. Inflation, according to the Fed’s preferred gauge, rose 3.6% in July compared with a year earlier, the biggest increase in three decades. The month-to-month increase slowed from 0.5% to 0.3%.
Complicating the Fed’s decision-making, the resurgence of the pandemic, led by the delta variant, has confounded the Fed’s expectations that the economy and job market would be on a clear path to improvement by this fall. The delta variant could slow spending in such areas as air travel, restaurant meals and entertainment.
In his remarks Friday, Powell didn’t outline any specific timetable for the Fed to begin slowing its bond purchases. Many economists say one or two more strong monthly jobs reports would likely trigger the start of a pullback before year’s end.
“Even if we see another big gain in payroll employment in August, we suspect that the delta variant threat means the majority of officials will want to wait until the November meeting to give the green light,” said Paul Ashworth, chief U.S. economist at Capital Economics.
OTTAWA – Canada’s unemployment rate held steady at 6.5 per cent last month as hiring remained weak across the economy.
Statistics Canada’s labour force survey on Friday said employment rose by a modest 15,000 jobs in October.
Business, building and support services saw the largest gain in employment.
Meanwhile, finance, insurance, real estate, rental and leasing experienced the largest decline.
Many economists see weakness in the job market continuing in the short term, before the Bank of Canada’s interest rate cuts spark a rebound in economic growth next year.
Despite ongoing softness in the labour market, however, strong wage growth has raged on in Canada. Average hourly wages in October grew 4.9 per cent from a year ago, reaching $35.76.
Friday’s report also shed some light on the financial health of households.
According to the agency, 28.8 per cent of Canadians aged 15 or older were living in a household that had difficulty meeting financial needs – like food and housing – in the previous four weeks.
That was down from 33.1 per cent in October 2023 and 35.5 per cent in October 2022, but still above the 20.4 per cent figure recorded in October 2020.
People living in a rented home were more likely to report difficulty meeting financial needs, with nearly four in 10 reporting that was the case.
That compares with just under a quarter of those living in an owned home by a household member.
Immigrants were also more likely to report facing financial strain last month, with about four out of 10 immigrants who landed in the last year doing so.
That compares with about three in 10 more established immigrants and one in four of people born in Canada.
This report by The Canadian Press was first published Nov. 8, 2024.
The Canadian Institute for Health Information says health-care spending in Canada is projected to reach a new high in 2024.
The annual report released Thursday says total health spending is expected to hit $372 billion, or $9,054 per Canadian.
CIHI’s national analysis predicts expenditures will rise by 5.7 per cent in 2024, compared to 4.5 per cent in 2023 and 1.7 per cent in 2022.
This year’s health spending is estimated to represent 12.4 per cent of Canada’s gross domestic product. Excluding two years of the pandemic, it would be the highest ratio in the country’s history.
While it’s not unusual for health expenditures to outpace economic growth, the report says this could be the case for the next several years due to Canada’s growing population and its aging demographic.
Canada’s per capita spending on health care in 2022 was among the highest in the world, but still less than countries such as the United States and Sweden.
The report notes that the Canadian dental and pharmacare plans could push health-care spending even further as more people who previously couldn’t afford these services start using them.
This report by The Canadian Press was first published Nov. 7, 2024.
Canadian Press health coverage receives support through a partnership with the Canadian Medical Association. CP is solely responsible for this content.
As Canadians wake up to news that Donald Trump will return to the White House, the president-elect’s protectionist stance is casting a spotlight on what effect his second term will have on Canada-U.S. economic ties.
Some Canadian business leaders have expressed worry over Trump’s promise to introduce a universal 10 per cent tariff on all American imports.
A Canadian Chamber of Commerce report released last month suggested those tariffs would shrink the Canadian economy, resulting in around $30 billion per year in economic costs.
More than 77 per cent of Canadian exports go to the U.S.
Canada’s manufacturing sector faces the biggest risk should Trump push forward on imposing broad tariffs, said Canadian Manufacturers and Exporters president and CEO Dennis Darby. He said the sector is the “most trade-exposed” within Canada.
“It’s in the U.S.’s best interest, it’s in our best interest, but most importantly for consumers across North America, that we’re able to trade goods, materials, ingredients, as we have under the trade agreements,” Darby said in an interview.
“It’s a more complex or complicated outcome than it would have been with the Democrats, but we’ve had to deal with this before and we’re going to do our best to deal with it again.”
American economists have also warned Trump’s plan could cause inflation and possibly a recession, which could have ripple effects in Canada.
It’s consumers who will ultimately feel the burden of any inflationary effect caused by broad tariffs, said Darby.
“A tariff tends to raise costs, and it ultimately raises prices, so that’s something that we have to be prepared for,” he said.
“It could tilt production mandates. A tariff makes goods more expensive, but on the same token, it also will make inputs for the U.S. more expensive.”
A report last month by TD economist Marc Ercolao said research shows a full-scale implementation of Trump’s tariff plan could lead to a near-five per cent reduction in Canadian export volumes to the U.S. by early-2027, relative to current baseline forecasts.
Retaliation by Canada would also increase costs for domestic producers, and push import volumes lower in the process.
“Slowing import activity mitigates some of the negative net trade impact on total GDP enough to avoid a technical recession, but still produces a period of extended stagnation through 2025 and 2026,” Ercolao said.
Since the Canada-United States-Mexico Agreement came into effect in 2020, trade between Canada and the U.S. has surged by 46 per cent, according to the Toronto Region Board of Trade.
With that deal is up for review in 2026, Canadian Chamber of Commerce president and CEO Candace Laing said the Canadian government “must collaborate effectively with the Trump administration to preserve and strengthen our bilateral economic partnership.”
“With an impressive $3.6 billion in daily trade, Canada and the United States are each other’s closest international partners. The secure and efficient flow of goods and people across our border … remains essential for the economies of both countries,” she said in a statement.
“By resisting tariffs and trade barriers that will only raise prices and hurt consumers in both countries, Canada and the United States can strengthen resilient cross-border supply chains that enhance our shared economic security.”
This report by The Canadian Press was first published Nov. 6, 2024.
