Federal Reserve Chair Jerome Powell said the U.S. economy has a long way to go before fully recovering from the coronavirus pandemic and will need further support.
“The path forward will depend on keeping the virus under control, and on policy actions taken at all levels of government,” he told the House Financial Services Committee on Tuesday. While a recovery is underway, “both employment and overall economic activity, however, remain well below their pre-pandemic levels, and the path ahead continues to be highly uncertain.”
Read More: Powell and Mnuchin Set to Get Grilled on Need for More Stimulus
In his own remarks, U.S. Treasury Secretary Steven Mnuchin said he and the White House continue to seek an agreement with both parties in Congress on another fiscal relief package.
‘Still Needed’
“The President and I remain committed to providing support for American workers and businesses,” he said in testimony released Tuesday. “I believe a targeted package is still needed, and the administration is ready to reach a bipartisan agreement.”
Powell and Mnuchin’s appearance is a quarterly exercise mandated by the Cares Act passed by Congress in March, which appropriated about US$2 trillion to help speed the U.S. recovery. The pair are likely to face questions about their use of Cares Act funds and about what else should still be done.
Prospects for another round of fiscal support have further dimmed amid spiraling partisan tension over the battle to replace Supreme Court Justice Ruth Bader Ginsburg, with just 42 days remaining before the U.S. election.
Main Street
Powell was prepared for questions about the Fed’s troubled Main Street Lending Program, a US$600 billion facility aimed at providing credit to small- and mid-sized companies. He said Fed officials had responded to feedback by making adjustments to the program.
Still, he added, “Main Street loans may not be the right solution for some businesses, in part because the Cares Act states clearly that these loans cannot be forgiven.”
The Fed has come under criticism for the low take-up so far from the Main Street program. It has so far purchased just US$1.5 billion in loans, as of Sept. 16. Some banks, especially larger institutions, have balked at lending through the program to the riskier businesses that may need them the most.
Economists expect inflation reaccelerated to 3.1% in February
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People banking on an interest rate cut may not like the direction Canadian inflation is heading if analyst expectations prove correct.
Bloomberg analysts expect inflation to reaccelerate to 3.1 per cent in February when Statistics Canada releases its latest consumer price index (CPI) data on Tuesday, following a slowdown to 2.9 per cent year over year in January.
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Article contentArticle contentCPI core-trim and core-median, the measures the Bank of Canada is most focused on, are forecast to come in unchanged from the previous month at 3.3 per cent and 3.4 per cent, respectively.
Policymakers made it clear when they held interest rates on March 6 that inflation remained too widespread and persistent for them to begin cutting.
Here’s what economists are saying about tomorrow’s inflation numbers and what they mean for interest rates.
‘Can’t afford missteps’: Desjardins Financial
The Bank of Canada’s preferred measures “have become biased,” Royce Mendes, managing director and head of macro strategy, and Tiago Figueiredo, macro strategist, at Desjardins Financial, said in a note on March 18, “likely overestimating the true underlying inflation rate.”
They estimated the central bank’s preferred measures of core-trim and core-median inflation are overemphasizing items in the CPI basket of goods whose prices are rising more than five per cent. After adjusting for the “biases,” they estimate the bank’s measures are more in the neighbourhood of three per cent — which is at the top of the bank’s inflation target range of one to three per cent.
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Article content“If the Bank of Canada ignores our findings, officials risk leaving monetary policy restrictive for too long, inflicting unnecessary pain on households and businesses,” they said.
Markets have significantly scaled back their rate-cut expectations based on the central bank’s previous comments. Royce and Figueiredo are now calling for a first cut in June and three cuts of 25 basis points for the year.
“Given the tightrope Canadian central bankers are walking, they can’t afford any missteps,” they said.
‘Inflict too much damage’: National Bank
The danger exists that interest rates could end up hurting Canada’s economy more than intended, Matthieu Arseneau, Jocelyn Paquet and Daren King, economists at National Bank of Canada, said in a note.
“As the Bank of Canada’s latest communications have focused on inflation resilience rather than signs of weak growth, there is a risk that it will inflict too much damage on the economy by maintaining an overly restrictive monetary policy,” they said.
They argue there is already plenty of evidence pointing to the economy’s decline, including slowing gross domestic product per capita, which has fallen for six straight quarters. The jobs market is also on the fritz with the private sector having generated almost no new positions since June 2023, they added.
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Article content“Moreover, business survey data do not point to any improvement in this area over the next few months, with a significant proportion of companies reporting falling sales and a return to normal in the proportion of companies experiencing labour shortages,” the economists said.
Despite all these signs of weakness, inflation is stalling, they said, adding it is being overly influenced by historic population growth and the impact of housing and mortgage-interest costs.
The trio expect very tepid growth for 2024 of 0.3 per cent.
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Rising gas prices: RBC Economics
Higher energy prices likely boosted the main year-over-year inflation figure to 3.1 per cent in February, Royal Bank of Canada economists Carrie Freestone and Claire Fan said in a note.
Gasoline prices rose almost four per cent in February from the month before. But the pair believe a weakened Canadian economy and slumping consumer spending mean “price pressures in Canada are more likely to keep easing and narrowing (to fewer items in the CPI basket of goods).
China’s strong factory output and investment growth at the start of the year raised doubts over how soon policymakers will step up support still needed to boost demand and reach an ambitious growth target.
Industrial output rose 7% in January-February from the same period a year earlier, the National Bureau of Statistics said Monday, the fastest in two years and significantly exceeding estimates. Growth in fixed-asset investment accelerated to 4.2%, strongest since April. Retail sales increased 5.5%, roughly in line with projections.
Official economic data out of China for the January and February period came in better than expected. Industrial output rose 7%, higher than the 5% forecast by economists in a Reuters poll, and sped up from the 6.8% growth in December, according to data published Monday by the National Bureau of Statistics.
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Meanwhile, retail sales grew 5.5%, better than the 5.2% predicted by analysts but slowed from the previous period’s 7.4%.
Still, the country’s troubled real estate sector continues to weigh on the economy: Investment in property development fell 9%. Commercial real estate sales are also down double-digit percentages.
“The national economy maintained the momentum of recovery and growth and got off to a stable start,” the statistics office said in its release. Beijing typically releases combined data for January and February to smooth over distortions caused by the Lunar New Year holidays.
China’s shaky domestic demand
Clouding the strong numbers from Monday’s data release are the persistent signs of weak domestic demand in China. New bank lending in China fell more than expected in February, according to Reuters calculations based on People’s Bank of China data.