The Federal Reserve took a historic step Thursday by approving a new policy that aims to spur higher inflation and more aggressively push down unemployment, a strategy that will likely keep interest rates at rock bottom for years.
Traditionally, the Fed has taken a balanced approach, lowering interest rates to spur more borrowing and economic activity to create lots of jobs, and increasing rates when the economy ran so hot that it raised the prospect of excessive inflation.
Now, the Fed is effectively saying it will err on the side of more job creation and not worry as much about spikes in inflation. Instead of always aiming for 2% annual price increases, the central bank will target inflation that averages 2% over time. So, if price increases undershoot the Fed’s goal, as they have for most of the past decade, the Fed will let inflation run “moderately above 2% for some time,” as Fed Chair Jerome Powell put it.
USA TODAY economics reporter Paul Davidson breaks down the Fed’s landmark shift.
Why is the Fed taking this new approach?
Inflation has languished below the Fed’s 2% target even as unemployment reached a 50-year low of 3.5% last February. Normally, record low unemployment should spark higher inflation as businesses bid up wages to attract a smaller pool of workers, forcing firms to raise prices to maintain profits. After the COVID-19 pandemic triggered the nation’s steepest-ever recession this year, inflation has fallen even further while unemployment has shot up to 10.2%.
Although the Fed typically has tried to stave off surges in inflation, which burdens Americans with higher costs, Fed officials have become more worried about persistently low inflation. Meager inflation can lead to falling prices, or deflation, that prompts consumers to put off purchases as well as skimpy wage increases that especially hurt low- and middle-class Americans. Scant inflation also causes the Fed to keep interest rates historically low, giving it less room to cut rates in a downturn.
As a result, the Fed has little to lose right now by keeping its key rate near zero, which theoretically should help create more jobs, push down unemployment and allow inflation to heat up.
Fed makes historic change: Fed announces landmark policy shift to spur inflation, job growth, keeping rates low longer
Wasn’t the Fed already planning to keep rates near zero?
Yes, but the new policy likely ensures that rates will stay at that level even if the economy reaches full employment and inflation edges above the Fed’s 2% goal in a few years. In the past, the Fed probably would have raised rates in that scenario.
Who will benefit from the low rates?
Consumers and businesses already have gained from low rates that hold down borrowing costs for home and auto purchases, student loans, credit cards and factory construction, among other things. The new policy will mean Americans can enjoy very low borrowing costs for even longer, even after the economy recovers.
Job seekers will also be among the winners as low rates spark more economic activity and hiring.
What about the stock market?
Low interest rates already have led investors to move money from low-yielding bonds to stocks, helping lift the Standard & Poor’s 500 index to new records despite an economy that’s still trying to dig out of a brutal recession. The Fed’s vow to keep rates near zero longer has amplified that effect, says Chris Zaccarelli, chief investment officer of Independent Advisor Alliance.
Positive news on a COVID-19 vaccine or the economic recovery will further juice the market, Zaccarelli says. But with low rates now even more entrenched, negative news may hurt the market but probably won’t cause stocks to tank, he says.
“The Fed has put a floor under the market no matter what,” he says.
He adds, “Is there a risk the Fed is going to create a (market) bubble” that ultimately pops?
“Yes.”
How quickly will economy bounce back?: ‘What am I going to do at 55?’: More temporary layoffs could become permanent during COVID-19 recession
Who’s going to be hurt by the Fed’s new strategy?
Savers, especially seniors, stand to lose. After keeping its key rate near zero for years after the Great Recession of 2007-09, the Fed gradually raised it the past few years, boosting bank savings rates, especially for seniors with fixed incomes and fewer stock holdings. But as the pandemic virtually shut down the US economy, the Fed abruptly slashed rates back near zero in March, again pushing down savings returns. Money market rates are averaging well under 1%.
Will Fed’s attempt to stoke inflation work?
That’s not clear. Rates already have been historically low but inflation has been held back by long-term forces, such as discounted online shopping and a more globally-connected economy. Throw in slower economic growth as a result of an aging population and sluggish productivity gains. Keeping rates lower longer won’t necessarily lead to more borrowing and economic activity.
“There is no guarantee that this will deliver the hoped-for inflation overshoot,” says Michael Feroli, chief U.S. economist at J.P. Morgan. “There’s only so much (the Fed) can do.”
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.
