U.S. Federal Reserve Chair Jerome Powell speaks during a news conference on interest rates, the economy and monetary policy actions, at the Federal Reserve Building in Washington on June 15.OLIVIER DOULIERY/AFP/Getty Images
The U.S. Federal Reserve has announced its largest interest rate increase since 1994, and said that it would continue pushing borrowing costs higher in an effort to restrain the highest inflation in four decades.
Officials announced a 0.75 percentage point interest rate increase on Wednesday, lifting the benchmark federal funds rate to between 1.5 per cent and 1.75 per cent.
The move marks an abrupt shift at the world’s largest central bank, and suggests a willingness by the central bankers to squeeze the U.S. economy to prevent prices from spiralling further out of control.
Higher interest rates make borrowing more expensive for households and businesses, with the aim of reducing the amount of demand in the economy. This slows the pace of growth in consumer prices. But it can also lead to a recession if the central bank miscalculates and tightens monetary policy too much, curtailing consumer spending and business investment, and pushing up unemployment.
The Fed’s interest rate hikes in recent months and increasingly hawkish language have already led to tighter credit conditions in the United States and around the world. Global borrowing costs tend to follow what happens in the U.S. That’s led to a decline in house prices in some markets and a sharp sell-off in financial assets such as stocks.
Fed officials had previously signalled that they would announce an increase of a half a point this week. But they were surprised in the days leading to the rate decision by data that showed the rate of inflation continues to march higher. It hit a 40-year-high of 8.6 per cent in May.
Reports published in recent days also showed that Americans are beginning to expect persistently high inflation – a situation that makes the Fed’s job of getting the rate of inflation back to 2 per cent much more difficult.
“We’ve been expecting progress [on inflation], and we didn’t get that, we got sort of the opposite,” Fed chair Jerome Powell said at a news conference after the rate announcement.
Inflation was already at a multidecade high at the start of the year, eating into U.S. wages and savings. Russia’s invasion of Ukraine has made matters worse by pushing global oil and food prices sharply higher in recent months.
This has forced central banks, including the Bank of Canada, to begin raising interest rates rapidly in the hope of preventing high inflation from becoming entrenched, as happened in the 1970s and early 1980s.
Mr. Powell said he did not expect moves of 75 basis points to become common. But he said the Fed would likely consider a hike of 50 or 75 basis points at its meeting in July, with the goal of getting interest rates to a “modestly restrictive level” by the end of the year. (A basis point is one 100th of a percentage point.)
Economic projections published on Wednesday show that Fed officials now expect the federal funds rate will rise to 3.4 per cent by the end of the year, and to 3.8 per cent next year. That’s a stark change from March, when officials expected the benchmark rate to hit 1.9 per cent by the end of the year and 2.8 per cent by 2023.
“We aren’t going to declare victory until we really see convincing evidence, compelling evidence that inflation is coming down,” Mr. Powell said.
After the Fed’s mega rate hike, stock markets vacillated between fear and relief, capturing the tortured relationship between equities and interest rates. Despite the Fed’s hawkish turn, the S&P 500 index gained 1.46 per cent on the day, while the S&P/TSX Composite Index advanced by 0.32 per cent.
This follows a dramatic sell-off on Monday, after the idea that the Fed would move 75 basis points became widespread in financial markets.
In general, equity investors prefer low rates – they make stocks more attractive than low-yielding bonds, and their economic effect tends to boost corporate earnings by making it cheaper to borrow.
This had been the case through the first two years of the pandemic, when emergency central bank action on rates helped orchestrate a monumental rebound in stock markets. From the lows of March, 2020, the S&P/TSX Composite Index roughly doubled over the next two years, while the S&P 500 index gained about 115 per cent.
Now, having lost control of inflation, central banks no longer have the luxury of coming to the stock market’s rescue as it has in the past, by slashing rates when appetite for risky assets such as stocks crumbles.
“The Fed’s primary goal is to tame inflation right now, and not to boost the equity markets,” Ipek Ozkardeskaya, senior analyst at Swissquote Bank, wrote in a note. “And depressed market conditions seem necessary in achieving that goal.”
But investors generally seem to have grasped that aggressive policy changes are required to conquer the worst inflation threat in a generation. Influential people in the U.S. financial community, such as activist investor Bill Ackman, have called for enormous rate hikes to restore the Fed’s credibility with financial markets.
The accelerated pace of interest rate hikes is risky. If the Fed tightens monetary policy too much, it could push the U.S. economy into a recession. The Fed’s updated economic forecast, published on Wednesday, doesn’t show the country’s economy falling into recession, but it does show growth slowing and unemployment rising.
The Fed now expects 1.7-per-cent annual GDP growth this year and next year, down from its March projection of 2.8-per-cent growth this year and 2.2 per cent next year. Meanwhile, it expects the rate of unemployment to rise from 3.6 per cent today to 3.9 per cent next year and 4.1 per cent in 2024.
“We don’t seek to put people out of work,” Mr. Powell said. “Of course, we never think too many people are working and fewer people need to have jobs. But we also think you really cannot have the kind of [robust] labour market we want without price stability.”
He said in May that he expects the U.S. economy can achieve a “softish” landing: reducing inflation without causing a sharp rise in unemployment. He reiterated this point on Wednesday, although he acknowledged that high oil prices and the conflict in Ukraine are making a soft landing harder to achieve.
“Many factors we don’t control are going to play a very significant role in deciding whether that’s possible or not,” Mr. Powell said. “There is a path for us to get there. It’s not getting easier, it’s getting more challenging.”
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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.
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