With interest rates near zero, Federal Reserve policy makers are likely to turn attention to other steps they could take to ensure a strong U.S. economic rebound once the coronavirus lock-down ends.
The Federal Open Market Committee is all but certain to keep its benchmark overnight rate in a target range of 0-.25 per cent, where it was lowered at an unscheduled FOMC on March 15 to help soften the pandemic’s blow.
The committee will release a statement at 2 p.m. with Chairman Jerome Powell holding a press conference 30 minutes later. Forecasts are not scheduled to be released at this meeting.
“Never underestimate the Fed,” said Diane Swonk, chief economist with Grant Thornton in Chicago. “The Fed will affirm it is still willing to use all tools at its disposal.” A Bloomberg survey of economists expects the central bank to keep rates near zero for three or more years.
Facing an unprecedented disruption that has put 26.5 million people out of work in the last five weeks, the Fed has slashed rates and pledged up to US$2.3 trillion in loans to aid businesses and state and local governments.
Powell can expect questions on whether the Fed is prepared to expand the scope of some of its lending programs, provide assistance to specific industries, and is it considering yield-curve targeting, among other topics.
Here’s a preview of what to expect:
Lending Facilities
The Fed has already announced an expansion of its lending to municipalities to include smaller cities and counties than initially planned. Another area that might need support is mortgage servicers, and Powell has previously noted the important role the housing market plays in the economy.
In addition, Treasury Secretary Steven Mnuchin has raised the possibility of extending aid to oil companies struggling with the collapse in the price of oil. But that prospect may face significant hurdles because the central bank is averse to lending to specific industries to avoid picking winners and losers.
Because lending facilities are authorized by the Fed’s board of governors, they could be announced in conjunction with an FOMC meeting or at another time.
Forward Guidance
Forward guidance for interest rates will be a key issue for the committee. At the last meeting, the FOMC said it would keep rates near zero until the economy weathers the crisis and moves toward meeting the central bank’s full employment and price stability mandates.
“The current forward guidance is confusing,” said Roberto Perli, a former Fed economist and partner at Cornerstone Macro LLC in Washington. “I expect the FOMC to clarify and lean more” in the direction of meeting its mandates, which may mean zero rates for several years.
Some Fed watchers advocate officials adopt specific thresholds to anchor how long they will keep rates near zero, including reprising targets the Fed used back in 2012 to assure investors that there would be no rate hike until unemployment falls to a certain level and inflation rises.
But this meeting may be too soon to provide that level of guidance, which is deliberately designed to stimulate economic activity, given millions of Americans are still sheltering from the virus at home.
What Bloomberg Economists Say
“As consequential as Fed actions have been over the past several weeks, Bloomberg Economics expects the April FOMC meeting to be comparatively quiet with no major policy announcements.”
— Carl Riccadonna, Yelena Shulyatyeva, Andrew Husby and Eliza Winger
FOMC Statement
The committee will need to adjust its statement to reflect very weak economic data since the last meeting, including record jobless claims, rising unemployment and falling consumption. First-quarter economic growth likely declined by the most since the last recession, according to economists surveyed by Bloomberg.
“I’d expect the opening paragraph to reference the grim employment and consumer spending data that have come out, as well as the unprecedented decline in energy prices and the broader disinflationary forces that are at work,” said Jonathan Wright, economics professor at Johns Hopkins University in Baltimore and a former Fed economist.
Balance Sheet
The FOMC is also certain to discuss its balance sheet expansion with purchases of Treasury notes and mortgage-backed securities during the crisis.
It has bought hundreds of billions of dollars of bonds in recent weeks, ballooning its balance sheet to a record US$6.57 trillion and declaring on March 23 that its purchases would be open-ended and “in the amounts needed to support smooth market functioning.”
But it has more recently been scaling back the buying as market conditions calmed, though it continues to add to its securities holdings.
While the Fed has primarily been buying assets to smooth market functioning, one option would be to explicitly shift to say it was buying securities to try to push longer term rates lower as a financial stimulus measure also known as quantitative easing.
That might be an announcement for the months ahead as the economy reopens, rather than this meeting with the lock-down still in place in many parts of the U.S.
Yield Curve Control
Yield curve control — a cousin of QE — where the Fed announces it is targeting a specific yield for a specific maturity of Treasury securities, has been discussed by policy makers including Governor Lael Brainard as an option to strengthen the central bank’s forward guidance.
At the moment the Fed sets the overnight rate and allows market forces to determine longer-term borrowing costs.
The Bank of Japan began experimenting with yield-curve control in 2016 and currently maintains a target of 0 per cent for the yield on 10-year government bonds, versus a target of -0.1 per cent for its benchmark rate. Advocates say the benefit is a central bank may have to purchase fewer assets overall if it commits to pegging yields at a certain maturity.
Again, it may be too soon for the Fed to announce a decision to adopt such a measure — but Powell could certainly flag it as a possibility in the future if it comes up during the press conference.
Interest on Reserves
Officials could tweak a secondary rate, known as interest on excess reserves, which helps to keep their benchmark rate in its target range. But that would be a technical move, not a change in policy.
The effective rate — the average rate paid by U.S. banks when borrowing dollars overnight from other banks — dipped to 0.04 per cent on April 27 after trading at 0.05 per cent for most of April. The Fed has on multiple occasions adjusted IOER when the effective rate drifted to within 5 basis points of the range’s upper or lower bound.
Press Conference
Powell, in his recent public appearances including on NBC’s “Today” show on March 26, has tried to strike a reassuring posture, noting that while the economy is declining, this is not a typical downturn and he remains hopeful for a robust recovery.
“Powell is unlikely to change his tone much, while reiterating his recent optimism that there’s no reason that the economy can’t quickly recover following the end of the Covid-19 pandemic,” said Tom Garretson, senior portfolio strategist for RBC Wealth Management.
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.
