WASHINGTON (AP) — Ever since the Federal Reserve signaled last fall that it was likely done raising interest rates, Wall Street traders, economists, car buyers, would-be homeowners — pretty much everyone — began obsessing over a single question: When will the Fed start cutting rates?
But now, with the U.S. economy showing surprising vigor, a different question has arisen: Will the central bank really cut rates three times this year, as the Fed itself has predicted — or even cut at all? The Fed typically cuts only when the economy appears to be weakening and needs help.
Lower interest rates would reduce borrowing costs for homes, cars and other major purchases and probably fuel higher stock prices, all of which could help accelerate growth. An even more robust economy might also benefit President Joe Biden’s re-election campaign.
Friday’s blockbuster jobs report for March reinforced the notion that the economy is managing quite nicely on its own. The government said employers added a huge burst of jobs last month — more than 300,000 — and the unemployment rate dipped to a low 3.8% from 3.9%.
Some analysts responded by arguing that it’s clear the last thing the economy needs now is more stimulus from lower rates.
“If the data is too strong, then why are we cutting?” asked Torsten Slok, chief economist at Apollo Global Management, a wealth management firm. “I think the Fed will not cut rates this year. Higher (rates) for longer is the answer.”
In March, the central bank’s policymakers — as a group — had penciled in three rate cuts for 2024, just as they had in December. Some economists still expect the Fed to carry out its first rate reduction in June or July. But even at last month’s Fed meeting, some cracks had emerged: Nine of the 19 policymakers forecast just two rate cuts or fewer for 2024.
Since then, Friday’s jobs data, combined with an unexpectedly buoyant report showing that factory output is expanding again after months of contracting, suggested that the economy is extending an unexpected run of healthy growth. Despite the Fed’s aggressive streak of rate hikes in 2022 and 2023, which sent mortgage rates and other borrowing costs surging, the economy is defying long-standing expectations that it would weaken.
Such trends have made some Fed officials nervous. Though inflation is down sharply from its peak, it remains stubbornly above the Fed’s 2% target. Rapid economic growth could reignite inflation pressures, undoing the progress that has been made.
In a slew of speeches this past week, several Fed officials stressed that there was little need to cut rates anytime soon. Instead, they said, they need more information about where exactly the economy is headed.
“It’s much too soon to think about cutting interest rates,” Lorie Logan, president of the Federal Reserve Bank of Dallas, said in a speech. “I will need to see more of the uncertainty resolved about which economic path we’re on.”
Raphael Bostic, head of the Atlanta Fed, said he favored just one rate cut this year — and not until the final three months. And Neel Kashkari, president of the Minneapolis Fed, sent stock prices falling Thursday afternoon after raising the possibility that the Fed might not cut at all this year.
“If we continue to see strong job growth,” Kashkari said, “if we continue to see strong consumer spending and strong GDP growth, then that raises the question in my mind, well, why would we cut rates?”
Still, a strong economy and hiring, by themselves, might not necessarily preclude rate reductions. Chair Jerome Powell and other officials, such as Loretta Mester, president of the Cleveland Fed, have underscored that the main factor in the Fed’s rate-cutting decision is when — or whether — inflation will resume its fall back to the central bank’s 2% target. They note that the economy managed to grow briskly in the second half of 2023 even while inflation fell steadily. Inflation is just 2.5% now, according to the Fed’s preferred measure, down from a peak of 7.1%.
Still, in January and February, “core” prices — which exclude volatile food and energy costs — rose faster than is consistent with the Fed’s target, raising concerns that inflation hasn’t been fully tamed.
As a result, the government’s upcoming reports on inflation will be scrutinized for any signs that inflation is easing further. Wednesday’s report on the consumer price index is expected to show that core prices rose 0.3% from February to March, which generally is too fast for the Fed’s liking.
One reason why Powell suspects the economy can keep growing even as inflation cools is that the supply of workers has soared in the past two years. This trend makes it easier for the economy to produce more and avoid shortages even when demand stays strong. It also helps keep wage and price growth in check.
A surge in immigration in the past two years, most of it unauthorized, has dramatically increased the number of workers willing to fill jobs. Their entry into the job market has mostly ended the labor shortages that bedeviled the economy after the pandemic and caused wages to spike for workers in retail, restaurants, and hotels.
“There are significantly more people working,” Powell said in a discussion at Stanford University this week. “It’s a bigger economy, rather than a tighter one.”
Whether that trend of a rising labor supply can continue this year will help determine the Fed’s next steps.
Still, speaking at a conference at the San Francisco Fed last month, even Powell acknowledged that the healthy economy reduces the urgency of rate cuts: “This economy doesn’t feel like it’s suffering from the current level of rates.”
Indeed, Slok and some Fed officials think borrowing costs aren’t restraining the economy as much as they would have in the past. That’s because in today’s economy, several trends could keep growth, inflation and interest rates higher than in the past two decades. These include a more productive economy, larger government budget deficits and the return of some manufacturing to the United States, where it is more expensive, from overseas.
“It is extremely difficult to make the case that the Fed should be cutting rates at all — and arguably, the debate about raising rates again should be more lively than it is currently,” said Thomas Simons, an economist at Jeffries, a brokerage.
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.
