As expected, the FOMC today raised its target for the Fed funds rate by 0.25 percent, bringing it to 0.75 percent. The accompanying statement describes the rate as still "accommodative", which in historical terms it surely is. The Fed expects to continue to tighten its policy settings in the year ahead, but the statement makes it very clear that the pace of tightening will be entirely data-dependent. In particular, the FOMC appears likely to focus on the inflation rate, which remains well below its preferred level of 2 percent, despite rising economic activity and a tightening labour market. Barring a sudden and unexpected uptick in inflation, 2017 seems likely to see rates rising by no more than 25 basis points per quarter.
Meanwhile, back in Ottawa....there is zero possibility that the Bank of Canada will follow the Fed's lead any time soon, despite a gently-rising chorus of voices suggesting it should. As noted here last week, former Bank of Canada Governor David dodge believes that all central banks should follow the Fed is moving rates in a predictable fashion back to more historically normal levels. That suggestion, well-argued as it was, seems to have fallen entirely on deaf ears.
Now a former StatsCan economist, Philip Cross, has weighed in on the same subject. He argues that the need for low rates in Canada largely disappeared in about 2009, when it became clear that Canadian banks were well-capitalized and well-run enough to weather the financial crisis. What the Bank of Canada is doing right now, he argues, is like "using antibiotics for the common cold".
It's certainly true that there are risks from keeping the low rate environment in place for so long -- it produces distortions in asset markets and leaves few options in the event of another real crisis. However, Cross's apparent assumption that the only reason for cutting rates was to keep the banks solvent is an oversimplification. That may have been the initial reason, but even once the stability of the banks was assured, there was still a need to protect the economy from the worst impacts of the crisis as it played out elsewhere, and low rates surely had a role to play in that regard. It scarcely bears thinking how the Canadian economy would have performed in an environment of rising domestic rates and a strengthening exchange rate.
That said, there are few signs that the Bank of Canada's "lower for longer" rate policy is working any more. Low rates were supposed to weaken the dollar -- which they did, at least for a time -- and the weak dollar in turn was supposed to facilitate a "rotation" in the economy, away from dependence on resource extraction. The sluggish performance of non-oil exports shows that isn't working as planned.
In fact, low rates aren't even providing a boost to activity in interest-sensitive sectors of the economy, such as housing. This piece from Bloomberg points out that although housing prices in Vancouver and Toronto have been soaring in the low interest rate environment, new homebuilding has been largely stagnant. Bloomberg seems to want to attribute that to a shortage of appropriately zoned land, and there may be some truth to that in the case of Vancouver. Overall, however, it is equally plausible to suggest that developers are benefiting from the shortage of property -- the value of each condo they build rises sharply even while the cranes are still on-site -- and so have little incentive to alleviate that shortage by putting up more homes.
Bank of Canada Governor Stephen Poloz knows all of this, which is why he has been an enthusiastic supporter of the Trudeau government's plans for fiscal stimulus. However, even if monetary policy is largely played-out as a way of boosting domestic growth, the Bank is in no rush to find out what might happen once it embarks on its own course of tightening.
No comments:
Post a Comment