(Reuters) – If 2020 was the year the Federal Reserve overhauled its game plan for supporting the U.S. economy, 2021 will be the year its new approach gets tested should a coronavirus vaccine deliver the lift that many analysts expect.
In its final policy meeting of the year this week, the U.S. central bank is expected to keep its key overnight interest rate pinned near zero and to signal it will stay there for years to come; many analysts also expect new guidance on how long the Fed will keep up its massive bond-buying program.
The super-easy monetary policy is part of a long-term strategy the Fed adopted in August to help it navigate a world of persistently low interest rates that limits the central bank’s options for fighting downturns and makes it difficult to hit its 2% inflation goal.
The idea is to counteract any unhealthy downward drag on prices by letting the economy run hotter than in the past. The Fed now plans to keep rates near zero until the economy reaches full employment and inflation hits 2% and is on track to exceed it.
Re-upping that bold promise this week won’t seem out of place amid the alarming U.S. rise in COVID-19 cases and deaths that threatens to stall a still-partial recovery. The labor market has regenerated only about half of the 22 million jobs lost since the pandemic began.
But next year, when a full rollout of new coronavirus vaccines is expected to make it gradually safer to dine out, travel, and resume other activities put on hold during the crisis, the Fed’s new framework will be tested.
Economic growth is expected to pick up, and job gains with it, both views that are likely to be reflected in fresh economic projections released after the Fed wraps up its two-day meeting on Wednesday.
But the central bank’s so-called “dot plot” of interest rate expectations, included in those projections, will likely show most policymakers still see rates at zero through 2023.
That’s consistent with the new framework if the economy hasn’t achieved sustained 2% inflation by then.
But Aneta Markowska, chief financial economist at Jefferies, said it “would be nice (for the Fed) to demonstrate what happens to the reaction function after inflation reaches 2%.”
‘PLAYING THE LONG GAME’
The first opportunity could come in the spring.
A sharp increase in demand as COVID-19 inoculations allow more of the economy to reopen could push inflation above the Fed’s 2% target, at least for a time, says Andrew Hunter, senior U.S. economist at Capital Economics.
At that point, “the Fed may have to take slightly clearer steps to emphasize that they are not going to raise rates,” Hunter said.
Or, as Chicago Fed President Charles Evans has explained it, the Fed will need to show it is “in it to win it.” Exactly what that means will depend on the circumstances.
If markets push up long-run interest rates a bit to reflect expectations for future faster growth, the Fed likely wouldn’t change course.
The problem, said AllianceBernstein senior economist Eric Winograd, is that “the market may be tempted to look at a cyclical upswing … and conclude that the Fed will respond as it always has, by starting to tighten.”
If traders begin pricing in earlier rate hikes, the Fed would need to react, either by correcting the market’s misperception verbally or, if needed, by tweaking its bond-buying program to push down further on longer-term borrowing costs through purchases of longer-term securities.
If the Fed issues new guidance on its asset purchase program this week, it may need to leave the door open to doing exactly that, in part as insurance against any market overreaction to an improving economic outlook next year.
“The Fed is playing the long game,” Winograd said.
(Reporting by Ann Saphir; Editing by Dan Burns and Paul Simao)
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.
