U.S. Federal Reserve Chair Jerome Powell delivered a stark message on Friday: the Fed will likely impose more large interest rate hikes in coming months and is resolutely focused on taming the highest inflation in four decades.
Powell also warned more explicitly than he has in the past that the Fed’s continued tightening of credit will cause pain for many households and businesses, as its higher rates further slow the economy and potentially lead to job losses.
“These are the unfortunate costs of reducing inflation,” he said in a high-profile speech at the Fed’s annual economic symposium in Jackson Hole, Wyo. “But a failure to restore price stability would mean far greater pain.”
Investors had been hoping for a signal that the Fed might moderate its rate increases later this year if inflation were to show further signs of easing. But the Fed chair indicated that that time may not be near.
“I’m not surprised at anything that he had to say,” said David Baskin, founder of Baskin Wealth Management in Toronto. “The biggest fear that the central bankers have is that inflation will get away from them, and by that I mean that everybody will expect inflation to remain high.”
Stocks tumbled after Powell’s speech on Friday, as investors pondered the prospect of higher borrowing costs sticking around for a while.
The Dow Jones Industrial Average was down by 1008 points, or 3 per cent, by the end of the trading day, while the technology-focused Nasdaq Index was off by even more — almost 4 per cent.
The Toronto Stock Exchange’s benchmark index held up comparatively better, off by 299 points, just shy of 1.5 per cent.
“I think the market was hoping for something a little more … mild, saying that, you know, ‘we don’t want to raise interest rates too fast and terrify everybody,'” Baskin added.
The Fed is trying to manage expectations and concerns that come with inflation, like workers and unions potentially seeking higher raises and suppliers hiking prices in the anticipation of rising product costs, he said.
“What the central bankers really need to do is break the cycle of expectation and make people believe that inflation is going to come down and come down quite quickly. And their tool for doing that, of course, is to raise interest rates.”
Fed might slow pace of rate hikes ‘at some point’
After hiking its key short term rate by three-quarters of a point at each of its past two meetings — part of the Fed’s fastest series of rate increases since the early 1980s — Powell said the Fed might ease up on that pace “at some point” — suggesting that any such slowing isn’t near.
Powell said the size of the Fed’s rate increase at its next meeting in late September — whether one-half or three-quarters of a percentage point — will depend on inflation and jobs data. An increase of either size, though, would exceed the Fed’s traditional quarter-point hike, a reflection of how severe inflation has become.
Sal Guatieri, a senior economist at BMO, wrote that economists will be looking for a hike of 50 basis points, with rates peaking between 3.50 per cent and 3.75 per cent, when the next rate increase will be announced on Sept. 21.
Such a move “should be ‘sufficiently restrictive’ to cool demand and gradually lower inflation without tipping the economy into a deep downturn,” Guatieri wrote.
WATCH | What the U.S. Federal Reserve signals might mean:
U.S. central bank keen to drag inflation down
2 months ago
Duration 3:24
CBC News senior business correspondent Peter Armstrong breaks down what the U.S. central bank’s interest rate hike signals for the economy, and what it could mean for Canadians dealing with inflation squeezing their budgets
While lower inflation readings that have been reported for July have been “welcome,” the Fed chair said, “a single month’s improvement falls far short of what the Committee will need to see before we are confident that inflation is moving down.”
Powell noted that the history of high inflation in the 1970s, when the central bank sought to counter high prices with only intermittent rate hikes, shows that the Fed must stay focused.
“The historical record cautions strongly against prematurely” lowering interest rates, he said. “We must keep at it until the job is done.”
Powell’s speech is the marquee event of the the Fed’s annual economic symposium at Jackson Hole, the first time the conference of central bankers is being held in person since 2019, as it went virtual for two years during the COVID-19 pandemic.
Since March, the Fed has implemented its fastest pace of rate increases in decades to try to curb inflation, which has punished households with soaring costs for food, gas, rent and other necessities. The central bank has lifted its benchmark rate by two full percentage points in just four meetings, to a range of 2.25 per cent to 2.5 per cent.
Those hikes have led to higher costs for mortgages, car loans and other consumer and business borrowing. Home sales have been plunging since the Fed first signaled it would raise borrowing costs.
Slowing the economy without triggering a recession
In June, the Fed’s policymakers signaled that they expected to end 2022 with their key rate in a range of 3.25 per cent to 3.5 per cent, and then rise further next year to between 3.75 per cent and 4 per cent. If rates reach projected levels at the end of this year, they would be at their highest point since 2008.
Powell is betting that he can engineer a high-risk outcome: slow the economy enough to ease inflation pressures yet not so much as to trigger a recession.
WATCH | U.S. interest rates will affect Canadians as well:
What the U.S. Federal Reserve’s interest rate hike means for inflation
2 months ago
Duration 1:40
CBC’s senior business correspondent Peter Armstrong helps makes sense of the U.S. Federal Reserve’s interest rate hike — and what it might signal for the Canadian economy.
The Fed chair’s task has been complicated by the U.S. economy’s cloudy picture: On Thursday, the U.S. government said its economy shrank at a 0.6 per cent annual rate in the period between April and June, the second straight quarter of contraction. Yet employers are still hiring rapidly, and the number of people seeking unemployment aid — a measure of layoffs — remains relatively low.
At the same time, inflation is still crushingly high, though it has shown some signs of easing, notably in the form of declining gas prices.
At its meeting in July, Fed policymakers expressed two competing concerns that highlighted their delicate task.
According to minutes from that meeting, the officials — who aren’t identified by name — have prioritized their inflation fight. Still, some officials said there was a risk that the Fed would raise borrowing costs more than necessary, risking a recession. If inflation were to fall closer to the Fed’s two per cent target and the economy weakened further, those diverging views could become hard to reconcile.
MONTREAL – Travel company Transat AT Inc. reported a loss in its latest quarter compared with a profit a year earlier as its revenue edged lower.
The parent company of Air Transat says it lost $39.9 million or $1.03 per diluted share in its quarter ended July 31.
The result compared with a profit of $57.3 million or $1.49 per diluted share a year earlier.
Revenue in what was the company’s third quarter totalled $736.2 million, down from $746.3 million in the same quarter last year.
On an adjusted basis, Transat says it lost $1.10 per share in its latest quarter compared with an adjusted profit of $1.10 per share a year earlier.
Transat chief executive Annick Guérard says demand for leisure travel remains healthy, as evidenced by higher traffic, but consumers are increasingly price conscious given the current economic uncertainty.
This report by The Canadian Press was first published Sept. 12, 2024.
Dollarama Inc.’s food aisles may have expanded far beyond sweet treats or piles of gum by the checkout counter in recent years, but its chief executive maintains his company is “not in the grocery business,” even if it’s keeping an eye on the sector.
“It’s just one small part of our store,” Neil Rossy told analysts on a Wednesday call, where he was questioned about the company’s food merchandise and rivals playing in the same space.
“We will keep an eye on all retailers — like all retailers keep an eye on us — to make sure that we’re competitive and we understand what’s out there.”
Over the last decade and as consumers have more recently sought deals, Dollarama’s food merchandise has expanded to include bread and pantry staples like cereal, rice and pasta sold at prices on par or below supermarkets.
However, the competition in the discount segment of the market Dollarama operates in intensified recently when the country’s biggest grocery chain began piloting a new ultra-discount store.
The No Name stores being tested by Loblaw Cos. Ltd. in Windsor, St. Catharines and Brockville, Ont., are billed as 20 per cent cheaper than discount retail competitors including No Frills. The grocery giant is able to offer such cost savings by relying on a smaller store footprint, fewer chilled products and a hearty range of No Name merchandise.
Though Rossy brushed off notions that his company is a supermarket challenger, grocers aren’t off his radar.
“All retailers in Canada are realistic about the fact that everyone is everyone’s competition on any given item or category,” he said.
Rossy declined to reveal how much of the chain’s sales would overlap with Loblaw or the food category, arguing the vast variety of items Dollarama sells is its strength rather than its grocery products alone.
“What makes Dollarama Dollarama is a very wide assortment of different departments that somewhat represent the old five-and-dime local convenience store,” he said.
The breadth of Dollarama’s offerings helped carry the company to a second-quarter profit of $285.9 million, up from $245.8 million in the same quarter last year as its sales rose 7.4 per cent.
The retailer said Wednesday the profit amounted to $1.02 per diluted share for the 13-week period ended July 28, up from 86 cents per diluted share a year earlier.
The period the quarter covers includes the start of summer, when Rossy said the weather was “terrible.”
“The weather got slightly better towards the end of the summer and our sales certainly increased, but not enough to make up for the season’s horrible start,” he said.
Sales totalled $1.56 billion for the quarter, up from $1.46 billion in the same quarter last year.
Comparable store sales, a key metric for retailers, increased 4.7 per cent, while the average transaction was down2.2 per cent and traffic was up seven per cent, RBC analyst Irene Nattel pointed out.
She told investors in a note that the numbers reflect “solid demand as cautious consumers focus on core consumables and everyday essentials.”
Analysts have attributed such behaviour to interest rates that have been slow to drop and high prices of key consumer goods, which are weighing on household budgets.
To cope, many Canadians have spent more time seeking deals, trading down to more affordable brands and forgoing small luxuries they would treat themselves to in better economic times.
“When people feel squeezed, they tend to shy away from discretionary, focus on the basics,” Rossy said. “When people are feeling good about their wallet, they tend to be more lax about the basics and more willing to spend on discretionary.”
The current economic situation has drawn in not just the average Canadian looking to save a buck or two, but also wealthier consumers.
“When the entire economy is feeling slightly squeezed, we get more consumers who might not have to or want to shop at a Dollarama generally or who enjoy shopping at a Dollarama but have the luxury of not having to worry about the price in some other store that they happen to be standing in that has those goods,” Rossy said.
“Well, when times are tougher, they’ll consider the extra five minutes to go to the store next door.”
This report by The Canadian Press was first published Sept. 11, 2024.
TORONTO – The U.S. Consumer Financial Protection Bureau has ordered TD Bank Group to pay US$28 million for repeatedly sharing inaccurate, negative information about its customers to consumer reporting companies.
The agency says TD has to pay US$7.76 million in total to tens of thousands of victims of its illegal actions, along with a US$20 million civil penalty.
It says TD shared information that contained systemic errors about credit card and bank deposit accounts to consumer reporting companies, which can include credit reports as well as screening reports for tenants and employees and other background checks.
CFPB director Rohit Chopra says in a statement that TD threatened the consumer reports of customers with fraudulent information then “barely lifted a finger to fix it,” and that regulators will need to “focus major attention” on TD Bank to change its course.
TD says in a statement it self-identified these issues and proactively worked to improve its practices, and that it is committed to delivering on its responsibilities to its customers.
The bank also faces scrutiny in the U.S. over its anti-money laundering program where it expects to pay more than US$3 billion in monetary penalties to resolve.
This report by The Canadian Press was first published Sept. 11, 2024.
