Economy

Opinion | Powell Needs to Cool the Economy Now to Avoid Recession Later – The New York Times

Published

3 years ago

November 22, 2021

It’s official: President Biden will seek to keep Jerome Powell at the helm of the Federal Reserve for another four-year term. Mr. Powell has his work cut out for him. With inflation rising to alarming levels, the Fed should be making moves to cool the economy. But under its dual mandate the agency is also obligated to ensure maximum sustainable employment.

At present, the Fed is erring too much on the side of maximum employment. Instead, Mr. Powell must tip the scales back in favor of price stability. If he doesn’t, he risks inviting a sluggish economy — or even a recession — in the coming years.

The Fed’s loose monetary policy — keeping the key interest rate it controls close to zero and purchasing large quantities of government bonds and mortgage-backed securities — provides juice to the economy and increases employers’ need for workers. It has contributed to troubling price increases that show signs of accelerating. On net, over half of small businesses, the highest on record, plan to increase their prices in the next three months, according to a National Federation of Independent Business survey. Investors in the bond market expect inflation to average around 3 percent over the next five years — nearly double their expectation from one year ago.

By running the economy so hot, Mr. Powell may think he is giving idle workers their best shot at re-entering employment. At present, there are six million fewer jobs than there would have been without the pandemic. Among workers ages 25 to 54, work force participation is down 1.4 percent from the start of the pandemic in February 2020. The rate for younger workers is 2.1 percent lower, and workers over the age of 54 have a nearly 5 percent reduction in participation.

As he enters his second term, Mr. Powell must confront the fact that many of those missing workers aren’t coming back. A large share of them have taken early retirement or are otherwise reluctant to return to their prepandemic lives. Inflationary monetary policy and a hot economy won’t change most of their minds.

Many others might come back under the right circumstances. They are temporarily on the sidelines because of Covid fears, child care problems, swollen bank balances and excessively generous government programs.

But by the time they are ready to return to the work force next year, the economy could be slowing under the weight of inflation. And as concerns about inflation become more ingrained in the psychology of consumers and businesses, the threat of fast price growth might leave the Fed with no choice but to rapidly increase interest rates, communicating to investors and businesses that it is worried about the economy.

This would slow business and consumer spending, possibly shutting even more workers out of jobs. So what seems like the pro-labor move — taking less aggressive action to fight inflation — is actually the riskier option for workers.

Mr. Powell has indicated that the Fed will wind down its purchases of Treasury and mortgage-backed securities over the first half of next year. After that, it will probably begin increasing interest rates in the summer.

Instead, Mr. Powell should immediately take tougher action to fight inflation. Rather than slowly reducing its purchases of mortgage-backed securities, given the white-hot housing market, the Fed should immediately stop buying them. It should aim to eliminate all additional asset purchases by the time Fed officials hold their March meeting, not June.

In addition, the Fed should signal that it expects to begin raising interest rates early in 2022, and that it is willing to increase rates several times next year. It should also more clearly acknowledge the threat inflation poses to household finances, business psychology and to the economy as a whole.

If this works, the Consumer Price Index may still be growing at an uncomfortable clip in the third quarter of 2022, but at a much slower pace than it is today and otherwise would be. This would accommodate a gradual and steady labor-market recovery while avoiding the risk of the Fed abruptly throwing the economy into reverse.

But it’s not just unwise Fed policy that could damage the economy. President Biden’s Build Back Better agenda would make our already troubling inflation problem worse. According to the nonpartisan Congressional Budget Office, this ambitious agenda would increase the deficit by around $300 billion over 2022 and 2023. The bill would also increase household income through more generous tax credits and deductions, encouraging consumer demand and putting upward pressure on inflation. Moreover, the one-year expansion of the child credit in the current bill could be extended. If so, Build Back Better would increase the deficit by around $400 billion over the next two years.

The White House argues that Build Back Better will reduce inflation over the next decade, and a few components of it might do that. For example, if its child-care provisions make it easier for parents to work, that would put downward pressure on wages and prices.

But even if they eventually materialize, any disinflationary forces won’t have kicked in next year. It will take time for the bill’s new programs to come online, and for people to rearrange their lives to take advantage of them. On the other hand, the extra demand for goods and services generated by the bill’s boost to household income would happen next year, as soon as government checks are deposited in people’s bank accounts. For purposes of taming inflation, what matters most is the effect the bill will have over the next year or two.

Some may think the bill is worth the cost of higher inflation, or even a recession. But this is a false choice: Mr. Biden will still be president in 2022. He should wait to see how the economy evolves before deciding if building back better will make things worse.

Of course, concerns over inflation and the recovery of the work force may well turn out to be overwrought. But Mr. Powell faces a very different economy now than he did when he assumed leadership of the Fed in 2018. Today, the balance of risks favors more aggressive tightening — immediately.

Michael R. Strain (@MichaelRStrain) is a senior fellow and the director of economic policy studies at the American Enterprise Institute.

The Times is committed to publishing a diversity of letters to the editor. We’d like to hear what you think about this or any of our articles. Here are some tips. And here’s our email: letters@nytimes.com.

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Economy

Canada’s unemployment rate holds steady at 6.5% in October, economy adds 15,000 jobs

Published

2 days ago

November 8, 2024

Anne Joseph

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.

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Economy

Health-care spending expected to outpace economy and reach $372 billion in 2024: CIHI

Published

3 days ago

November 6, 2024

Anne Joseph

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.

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Economy

Trump’s victory sparks concerns over ripple effect on Canadian economy

Published

4 days ago

November 6, 2024

Anne Joseph

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.

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