At the Fed’s policy meeting this week and at a news conference to follow, the chair will take up a new challenge: convincing financial markets that even as the economic picture brightens, the Fed will be able to continue providing support without contributing to high inflation. Powell’s message will likely be that the economy still needs substantial backing from the Fed in the form of short-term interest rates near zero and bond purchases that are intended to lower long-term borrowing rates.
Complicating the Fed’s task is that investors envision a swift and robust recovery later this year that could accelerate inflation and send long-term rates surging. Behind that fear is the belief that as vaccines are more widely administered and money from President Joe Biden’s $1.9 trillion rescue package flows through the economy, growth will accelerate so fast that the Fed will feel compelled to quickly raise rates to quell inflation pressures. If that were to happen, the economy could suffer another setback.
The economy’s outlook has improved significantly since the Fed’s policymaking committee last met in late January. Job gains accelerated in February, sales at retail stores jumped after $600 relief checks were distributed at the start of the year and Biden signed his economic relief package into law last week.
The stronger outlook has sent the yield on the 10-year Treasury note climbing as investors have dumped bonds, which are typically safe-haven investments during downturns. The yield on the 10-year reached 1.62% in afternoon trading Friday; it had been below 1% at the end of last year. The rise in the 10-year yield in recent weeks “caught my attention,” Powell acknowledged last week.
In anticipation of faster growth and inflation, investors have priced in at least three Fed rate hikes by 2023 — a much earlier lift-off than the Fed itself has forecast. In December, the central bank’s policymakers collectively projected that they wouldn’t begin raising rates until at least 2024.
Seeking to reassure investors, Fed officials have said they regard the rise in the 10-year yield as a positive sign, evidence that the financial markets expect the economy to steadily strengthen. Many economists agree.
“Markets are responding to the ongoing, and accelerating, recovery,” said Lewis Alexander, an economist at the investment bank Nomura. “In many respects, the Fed is dealing with the problems of success.”
But if longer-term rates rise too high, the economy could suffer as borrowing becomes more expensive for consumers and businesses. The average rate on a 30-year fixed mortgage, for example, has topped 3% after having set a record low of 2.65% as recently as early January. Mortgage rates could price out some would-be home buyers if they go too high.
When the Fed’s meeting ends Wednesday, much attention will focus on the release of its updated economic and interest rate projections. The central bank issued its most recent projections in mid-December, before it was clear whether Congress would approve a US$900-billion rescue package or how much further federal aid Biden would manage to enact. Since then, roughly US$2.8 trillion in economic relief has been approved.
Average daily Covid infections have also dropped precipitously, and vaccinations have accelerated. As a consequence, Fed officials will likely boost their projections for economic growth for this year and for 2022, lower their estimates for unemployment and raise their expectations for inflation.
Fed officials may project economic growth this year of as much as 5%, economists say, up from their December estimate of 4.2%. After a 3.5% contraction in 2020, many private-sector analysts are forecasting growth of roughly 7% this year. That would be the fastest calendar-year U.S. expansion since 1984.
Acknowledging those improvements could make it harder for the Fed to convince financial markets that it will remain “patient” about raising rates, as Powell has stressed in recent weeks.
In his news conference, Powell will likely focus on the persistent weakness in the job market. There are 9.5 million fewer jobs than there were just before the pandemic erupted a year ago. That is more jobs than were lost in the 2008-2009 Great Recession.
The unemployment rate, at 6.2%, is far below the 14.8% peak reached last April. But Fed officials often cite an alternative measure that includes people who are out of work but aren’t looking for a job and so aren’t counted as unemployed. That figure is roughly 9.5%.
One option for Powell would be to discuss financial tools the Fed could use if longer-term rates rose so quickly that they could threaten the economy’s health. The Fed could shift more of its monthly purchases of Treasurys to longer-term securities, such as 10-year notes, while cutting back on its short-term bond buys.
Or Powell could consider buying more overall government securities, with the additional purchases focused on longer-term bonds. That’s what Christine Lagarde, president of the European Central Bank, said last week she would do.
“Financial markets are looking for action here, not words,” said Joe Brusuelas, chief economist at tax and advisory firm RSM. “Powell’s in a difficult situation.”
Brusuelas suggested that Powell might be able to allay any concerns just by mentioning the Fed’s additional tools, without having to implement them.
Some economists expect the Fed to project that its next rate hike could occur by the end of 2023, earlier than they forecast in December. That move would reflect the improved economic outlook.
But it doesn’t necessarily mean the Fed will discuss any new steps, said William English, a former senior Fed official and finance professor at the Yale School of Management.
With the economy improving, “it would be a strange thing to react to that” by taking further steps to keep rates low, he said.
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.
