Some slowdown!

Three days on from Finance Minister Chrystia Freeland's poorly-received budget, new data from Statistics Canada cast serious doubt on the Government's logic in ballooning the Federal deficit. Canada's real GDP grew 0.5 percent in January, exceeding market expectations and more than reversing the marginal decline of 0.1 percent posted in December. Moreover, the early estimate for February shows a further 0.3 percent gain.  Even with December providing a weak :"handoff", it looks as though annualized real GDP growth for Q1 will be between 2.5 and 3.0 percent. 

Details of the report indicate widespread strength, with the sectors that contributed to December's weak result all rebounding smartly. Goods output rose 0.4 percent in the month, while services output rose 0.6 percent. Overall, 17 of the 20 sub-sectors tracked by StatsCan posted higher output in the month. The expected gains for February also appear to be reasonably broad-based. 

Much of the early reaction from the Bay Street economic community has focused on what these numbers mean for the Bank of Canada. If the economy is still not fully responding to the aggressive rate hikes of the past year, will the Bank have to call a halt to its "conditional" pause in tightening?  In the near term almost certainly not: the much-discussed base effect will keep year-on-year CPI on a downward track through mid-year, so the Bank can safely stay on the sidelines in the next month or two. Beyond that, the key to the Bank's actions will depend on the month-on-month gains in CPI, not the backward-looking year-on-year numbers. If the month-on-month numbers come in too high for the Bank's liking, a return to tightening after mid-year cannot be entirely ruled out.

More interesting than the monetary policy implications, however, is what the GDP data tells us about the recent budget.  Ms Freeland claimed that half of the C$ 10 billion increase in the projected deficit for FY 2022/23 (now just about over) was a result of lower-than-expected revenues,  as a result of the faltering economy.  Given what we already knew about the persistent strength in the jobs market, that seemed dubious even when she said it. Now that we know the economy entered the final quarter of the fiscal year on a strong note, it seems simply wrong.

Unless the economy crashed off a cliff in March, Federal revenues for the fiscal year will likely prove to be significantly higher than the budget forecast. That would be good news if it meant that the final deficit figure might turn out to be lower than the widely-criticized C$ 43 billion tabled on Tuesday -- unless, of course, Ms Freeland chooses to spend what she is likely to see as a nice little windfall.   

Call her irresponsible

Cast your mind back, if you will, to Canadian Finance Minister Chrystia Freeland's Fall Economic Statement in November 2022.  Freeland predicted a budget deficit for fiscal year 2022/23 (which ends in s few days time) of C$ 36 billion. I pointed out a couple of things about this in a blog post on November 26:

For the 2022/23 fiscal year to date (i.e. April-September), the budget has seen a surplus of C$ 1.7 billion, compared to a deficit of C$ 68.6 billion in the same period of fiscal 2021/22.  Revenues are up across the board, while spending is sharply lower as a result of the expiry of COVID-related programs. 

And I went on to say that it already seems likely that the final outcome will be a significantly lower deficit than the Finance Minister projected less than a month ago.

Not one of my better calls; you would think that after more than four decades watching and commenting on Canadian budgets, I would know better by now. It turns out that the "targeted" measures announced back in November were just a down payment on a whole new era of government spending, which Freeland laid out in detail in her 2023 Budget, delivered on Tuesday. 

The details of the spending plans are almost irrelevant; one apparent movie fan among the commentariat appropriately dubbed it as "Everything Everywhere all at once".  There is much money for health care, particularly publicly-funded dental care, and for green energy investment, two priorities of the Liberal government (and of the NDP whose votes it need to remain in office). There is also help in maintaining "affordability" for households affected by inflation, though the scale of this is literally laughable: the so-called "grocery rebate" for a low-income family of four amounts to C$ 9 per week. Supersize that poutine, baby!  There is a commitment to eliminate suddenly-discovered waste in government spending, which only makes you wonder why a government now in office for the better part of a decade hasn't gotten around to this before. 

Instead of looking at the details, let's look at the bottom line -- the deficit -- starting with a bit of historical perspective.  Justin Trudeau's Liberals won a general election in 2015 in part because of a promise to run small, time-limited deficits in order to boost the economy.  That soon turned into a run of quite significant deficits with no end in sight. Then along came COVID, and the Government quite correctly opened the spending taps to keep the economy afloat. 

And then came fiscal year 2022/23. Revenues bounced back smartly and COVID spending wound down rapidly, with the result already noted above: a balanced budget for the first half of the fiscal year, and the clear likelihood of a much reduced deficit for the full year, after the ravages caused by COVID.  This makes what has happened since the fall economic statement, and what the government is now planning for the years ahead, very hard to understand.

The projected deficit for the current fiscal year (reminder: just days to go before this ends) is now C$ 43 billion, an even bigger shortfall than expected in November. Given that, as we have seen, the budget was in balance for the first half of the fiscal year, this means that the government has in effect run a deficit at a C$ 80 billion annual rate over the past six months. There is a lot of accounting chicanery at work here, but the underlying point is valid. 

The projected deficit for FY 2023/24 is now C$ 40.1 billion, up from the C$ 30.6 billion projected just five months ago. The Government seeks to blame this in part on the slowing economy, which may come as news to Bank of Canada Governor Tiff Macklem, who is still fretting that the economy is overheated and is likely not a happy camper this morning. As for the out-years of the forecast period, the deficit is projected to fall to C$ 14 billion by 2027/28 -- a year that was expected, mere months ago,  to see a return to surplus. 

As ever the Government brags about Canada having the lowest debt/GDP ratio in the G7. That may be true, though it does not count the very substantial debt burden of most Canadian Provinces.  Moreover, it ignores the fact that the ratio is actually set to rise slightly in the next year or two, and given the chronic unreliability of medium-term fiscal projections, that is all that can be relied upon. 

What are Freeland and Trudeau up to here?  This looks like an election budget, but unless the "confidence and supply" pact with the NDP is about to unravel, no election is due for at least two more years. The sea of red ink at the Federal level contrasts starkly with the much more balanced budgets being tabled at the Provincial level this budget season: are the Provinces fooling themselves, or are the Federal Liberals just reverting to their tax-and-spend (well mostly. just spend) inclinations?  The verdict here is clear. This is a bad budget.  

Ontario budget: almost a non-event

After the fiscal ructions created by the COVID pandemic, the Ontario budget tabled on Thursday by Ontario Finance Minister Peter Bethlenfalvy represents a return to business as usual. In common with Provinces across Canada, Ontario is seeing a rapid and substantial improvement in its fiscal position, driven by the expiry of COVID-related spending programs and by inflation-driven revenue gains.

Even a quick glance at the bottom line -- the deficit projections -- makes the remarkable extent of the fiscal turnaround crystal clear. A year ago, the Government was projecting a deficit for the 2022/23 fiscal year of C$ 19.9 billion. With the end of that fiscal year now just days away, the actual outcome is now expected to be a deficit of just C$ 2.2 billion.  The improvement is expected to continue over the three-year planning horizon, with FY 2023/34 expected to show a deficit of C$ 1.3 billion (previous projection: C$ 12.3 billion), giving way to small surpluses in the two succeeding years, which had previously been forecast to show further deficits. If achieved, this outcome will of course set the Ford government up nicely for a giveaway budget ahead of the next Provincial election, expected in 2026.

The economic projections underlying the fiscal projections appear reasonable and are, in the usual way of things these days, based on private sector forecasts.  Provincial real GDP is expected to grow  marginally this year and to accelerate only modestly in the next two years, while inflation is projected to fall to 3.6 percent this year and decline to just above the Bank of Canada's target of 2 percent next year.

Although the budget trumpets the Government's plans to invest in key areas such as infrastructure and health care -- "the most ambitious capital plan in Ontario's history" --  spending growth over the planning period will be very limited. The dollar value of program spending for FY 2023/24 year will be almost unchanged from FY 2022/23, with the expiry of COVID programs making a direct comparison difficult.  For the remaining two years of the forecast period, nominal spending growth will be barely 3 percent, which implies minimal growth in real terms. 

There is one significant item absent from the spending plan that will bear careful watching over the coming weeks and months. The City of Toronto, by far the largest in Ontario and in all of Canada, has been appallingly mismanaged over the past eight years by now-disgraced former Mayor John Tory.  City services are collapsing (sadly not an exaggeration) and despite regularly holding out the begging bowl, the city cannot pay its bills. 

Before his ignominious departure, Tory had pleaded for more than C$ 500 million from the Province in order to balance the books. The budget did not even mention this.  Questioned about the issue, Bethlenfalvy suggested Ontario was waiting to see what help the Federal government might offer when it tables its own budget next week. Perhaps so, but it is equally likely that Ford is waiting to see whether he likes the cut of the new Mayor's jib before deciding how much help to provide; since the mayoral election will not take place until June, the city may be left twisting in the wind for some time to come. 

On, then, to that Federal budget. Will the Federal coffers show a similar revenue boost to that revealed by Bethlenfalvy yesterday? That seems very likely. Will Finance Minister Chrystia Freeland show as much spending restraint as Bethlenfalvy has? That seems much less certain. Tune in on March 28 to find out. 

Fed threads the needle

By the time of the FOMC announcement today, market expectations had coalesced around what turned out to be the actual outcome: a 25 basis point rate hike, accompanied by an increasing readiness to admit that the tightening cycle is nearing its end. This was not enough to prevent stocks from selling off sharply in the wake of the announcement, though it is hard to say if there was anything the Fed could have done today that would have pleased investors. 

Perhaps the most striking thing about the press release is the almost dismissive way it deals with the recent turmoil in financial markets. It baldly states that The US banking system is sound and resilient, before going on to note that Recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation.  This implies that going forward, the Fed will be monitoring the extent to which tighter credit conditions resulting from the recent crisis may mitigate the need for further policy action. 

That being said, the Fed evidently does not want to give the impression that further rate hikes are completely off the table: The Committee anticipates that some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time.  

Moreover,  the famous "dot plot" shows that FOMC members expect relatively elevated rates to stay in place for some time to come. Only one FOMC member expects the Fed funds target, now at 4.75-5.0 percent, to be below 5 percent at year end, while several expect it to be considerably higher. Expectations for 2024 centre around 4 percent, and for 2025 3 percent, still above the long-term expected value of 3.5 percent. 

Recent events, notably the sheer speed of the collapse of SVB, are literally without precedent. Both Fed Chair Powell and Treasury Secretary Yellen are hinting at the urgent need for a fresh round of regulatory reform (for which, read "tightening").  Today saw the Fed attempting to maintain the inflation fight without putting the financial system at further risk. That balancing act is likely to be needed for some time to come. 

Canada CPI for February: good but not great

Canada's headline consumer price index rose 5.2 percent in February from a year ago, a significant slowdown from the 5.9 percent recorded in January, according to data released by Statistics Canada this morning. The month-on-month increase was 0.4 percent (unadjusted), compared to 0.5 percent in January. The sharp fall in the year-on-year rate reflects the continuing impact of the base effect, as the 1.0 percent monthly gain recorded in February 2022 fell out of the calculation. 

Energy prices are now actually lower than they were a year ago, but food prices remain at problematic levels. The 10.6 percent year-on-year gain recorded in February marks the seventh straight double-digit increase in this key component. Excluding food and energy costs, core CPI rose 4.8 percent in the year to February, down from 4.9 percent in January.  

Mortgage interest costs are also rising sharply, as a direct consequence of the Bank of Canada's rate hikes. The yearly increase reached 23.9 percent in February, the fastest pace since 1982 (a time when absolute interest rate levels were massively higher than they are today). Excluding interest costs, CPI rose 4.7 percent in the year to February, down from 4.7 percent in January. 

Although the headline number is comforting for the Bank of Canada -- and for Canadian consumers -- the report is not unalloyed good news. The monthly rates of increase so far in 2023 annualize to a pace well above the Bank's 2 percent target, with the decline in the headline number heavily reliant on the base effect. Fortunately for the Bank, that effect will persist into mid-year, potentially allowing headline CPI to approach 3 percent by the third quarter. The Bank's preferred measures of core inflation are also proving sticky, with the mean of the three indices still above 5 percent.

Even without the uncertainty triggered by the problems in the banking sector, today's numbers would certainly justify the Bank maintaining its "conditional" pause through its next rate setting meeting in April. Beyond that time, if current banking problems translate into tighter lending standards, as seems very probable, then the resulting slowdown in the Canadian and global economies will further reduce the need for any further tightening moves.  We will find out on Wednesday whether Fed Chair Powell agrees, but it is looking very likely that we are at or at least in sight of the end of the tightening cycle. 

Ceteris paribus....

All other things being equal, the February CPI data released this morning would have given the Federal Reserve every reason to raise interest rates, possibly by a full 50 basis points, at next week's FOMC meeting. But as an early economics teacher of mine was fond of saying, "the ceteris are not always necessarily paribus". The past weekend's turmoil in the banking sector may well force the Fed to hold back, at least for this month. 

Headline CPI rose 0.4 percent in February, down from a 0.5 percent gain in the prior month. This served to lower the year-on-year rate to 6.0 percent, the lowest since September 2021. The data were broadly in line with expectations. The fact that the annual number fell significantly even though the monthly print was well above the Fed target range is further evidence of the influence of the "base effect", which will help drive the annual number lower until at least mid-year.  More than 70 percent of the increase in headline CPI was the result of a rise in the shelter component, while a fall in energy prices exerted some downward pressure on the aggregate figure. 

The data for core CPI (excluding food and energy) were slightly less encouraging.  The index rose 0.5 percent in the month, its fastest increase since September 2022. The year-on-year increase was 5.5 percent, once again held lower by the base effect. 

In themselves these numbers do not appear to justify any pause in the Fed's tightening cycle. Both the year-on-year numbers and the monthly increases point to inflation staying well above the 2 percent target. It remains the case that the Fed's rate moves are not addressing the actual causes of inflation, but that has not deterred the FOMC to this point and it is unlikely that it would be any deterrent this month. 

The SVB situation is, however, a different matter, especially as it is becoming clear that the bank's collapse was in large measure due to the Fed's past rate hikes, which served to make Treasuries the riskiest item on the balance sheet. It is certain that many (if not most) other banks are carrying significant losses on their Treasury holdings at this time, and the Fed will not wish to exacerbate the problem until the dust settles. If things calm down in the net few days, a 25 basis point rate hike is till possible on March 22, but a Canadian-style "conditional" pause is now a real possibility. 

Thoughts on SVB

The situation around the collapse of Silicon Valley Bank continues to move quickly, and at the time of writing it is far from certain that contagion to other banks can be avoided. This live feed from CNN is a useful way of monitoring events as they occur. For now, here are just a few thoughts on some aspects of the situation.

Moral hazard:  Treasury Secretary Yellen was adamant over the weekend that there would be no 2008-style bailouts of SVB or any other bank that got into similar trouble. Then it was announced that the FDIC would be guaranteeing full access to their money to all depositors at SVB, not just those covered by the existing $250,000 deposit insurance limit. Arguably, since shareholders in SVB are going to lose all their money, this is not strictly speaking a bailout. Still, it does raise questions about moral hazard: if all deposits are now in effect FDIC-insured, what incentive do large depositors have to ensure that they are placing their funds in safe institutions? Why should they not just move their money to whosever is paying the most on any give day, secure in the knowledge that Uncle Sam will make them whole if the worst happens/

There is a counter-argument, however. If you are a sizeable company responsible for a million-dollar payroll every week, you can hardly be expected to parcel out your cash in $250k tranches among numerous banks in order to keep everything fully insured. You can opt to deal only with one of the "too big to fail" banks, but if everyone starts to do that, competition within the US banking sector, which has already seen the number of banks fall precipitously in recent decades, will be eroded even further.  

The nature of risk: Secretary Yellen said that suggestions that SVB's problems were largely the result of its concentration on the high tech sector were incorrect. That does indeed appear to be the case: it looks as if an orderly wind-down of the bank's loan book -- something that is obviously not possible any longer -- would have produced enough cash to meet all of its liabilities. 

What actually did the bank in seems to have been....the Fed's aggressive tightening policies. SVB's extensive holdings of Treasuries fell sharply in value as the Fed raised rates. Prudent risk management would have seen SVB selling some of those holdings in order to raise cash. Instead it seems to have held onto them, only trying to unload them when the run on deposits actually began, at which point they were no longer adequate to pay out all those who wanted to be paid out in short order. 

There are many different kinds of risk. Treasuries are considered low risk because they are backed by the credit of the Government, but there are still major valuation risks resulting from interest rate movements, as SVB just discovered. Early in my career I as involved in the asset/liability management committee of a major Canadian bank. This was in the days before the swap market came into being, and the committee's job was to ensure a manageable balance between assets and liabilities within each maturity time "bucket". The swap market has drastically altered how these things are done, but it looks as if SVB was not paying attention to this at all. 

Bad behaviour: as is inevitable when something like this happens, stories are starting to emerge about possibly dodgy events within the bank just prior to its collapse. It has been reported that the CEO sold a chunk of stock not long before the collapse, which is prompting suggestions that he should be made to pay back the proceeds of the sale. There are also reports that employees of SVB received bonus payments just before the collapse; you would hope that the risk management team were not among the recipients. 

It's not just within the bank that there may have been some dubious behaviour. It looks as if the run was triggered by some well-known Silicon Valley names advising friends and competitors to get their money out pronto -- no doubt after first liquidating their own deposits.  In a world of near-instantaneous communication, it's not hard to trigger an all-but-unstoppable bank run that way, which points to the need for regulators to think hard about what needs to be done to contain this kind of issue in the future.

Fed policy: the collapse of SVB may well have been triggered by the Fed,  making Chair Powell's regular assertions that "we know what we are doing" look rather foolish. Does this mean that next week's FOMC meeting will keep rates on hold?  That seems to be the way markets are thinking right now. February CPI data, due out on Wednesday, will be crucial; a low print might give the Fed a convenient excuse to pause the tightening cycle, but it still seems likely that the FOMC would prefer to go ahead with a 25 basis point hike, purely for credibility's sake. 

Interesting times indeed! In a fast-moving situation, much of the foregoing may be proven dead wrong at any second, and no doubt there will be a lot more to be said in due course. 

Employment still rising, but what about wages?

Both the United States and Canada reported solid job gains for February. However, given recent comments from the central banks, it is perhaps appropriate to focus more on wage trends as a guide to future policy moves. Today's reports suggest diverging trends in wages in the two countries -- and not in the way you might expect.

The US economy added 311,000 jobs in February, well above the 205,000 markets had expected. There were small downward revisions to the previous two months' data and the unemployment rate edged up to 3.6 percent, but there is no doubt that the employment market remains tight. Surprisingly, however, wage growth remains very restrained: average hourly earnings rose only 0.2 percent in the month, resulting in a year-on-year rise of 4.6 percent, still well below the headline rate of inflation.

Market expectations for the March 22 FOMC meeting had tended to favour a 50 basis point hike after Chair Jerome Powell's hawkish testimony before Congress earlier in the week. Those expectations have now been scaled back towards a 25 basis point hike, although it is not clear how much this shift may have been driven by today's collapse of SVB bank rather than by the jobs report. Next week's CPI data represent the last major data point before the FOMC session. A helpful base effect is likely to push the year-on-year rate lower, which should make it easier for the Fed to settle on the smaller rate move. 

In Canada, StatsCan reported that the economy added 22.000 jobs in February. This was well below the outsize gains posted in the prior two months -- which have, somewhat surprisingly, not been revised away -- and left the unemployment rate at 5.0 percent, close to its all-time low. The private sector more than fully accounted for the month's job gains.

But what about wages?  Year-on-year wage gains reached a cyclical high of 5.8 percent in November 2022 before moving lower in December and January. However, the increase accelerated to 5.4 percent in February from January's 4.5 percent reading. It's entirely possible that February CPI data will show a year-on-year increase at or below the rise in wages. That would certainly raise questions about the Bank of Canada's "conditional" pause in tightening, even though there is scant evidence that the fall in inflation is the result of the Bank's policy moves. 

Interesting, isn't it? The central bank that has been talking tough may now have at least one good reason to go easy on further rate hikes, while the one that has been talking about a pause may have some explaining to do. 

Bank of Canada: on hold, for now

The Bank of Canada today kept its overnight rate target unchanged at 4.5 percent, in line with the "conditional" pause in tightening that it signalled at the previous Governing Council meeting. The press release makes it clear that the Bank is prepared to start raising rates again if it deems it necessary, but also gives some fairly specific guidance as to what it will take for rates to stay on hold. 

The Bank notes that economic developments over the past month have been broadly in line with expectations, but there are some important divergences that may have an impact on its policy options going forward. Internationally, In the United States and Europe, near-term outlooks for growth and inflation are both somewhat higher than expected in January. In particular, labour markets remain tight, and elevated core inflation is persisting. Growth in China is rebounding in the first quarter.   

In Canada, on the other hand, economic growth came in flat in the fourth quarter of 2022, lower than the Bank projected. With consumption, government spending and net exports all increasing, the weaker-than-expected GDP was largely because of a sizeable slowdown in inventory investment. Restrictive monetary policy continues to weigh on household spending, and business investment has weakened alongside slowing domestic and foreign demand.

The Bank believes that the relatively slow GDP growth it expects through the first half of this year will keep inflation moving lower. It still forecasts CPI to be close to 3 percent around mid-year, well below the January reading of 5.9 percent. And here the Bank offers  specific guidance as to what it will be focusing on: Year-over-year measures of core inflation ticked down to about 5%, and 3-month measures are around 3½%. Both will need to come down further, as will short-term inflation expectations, to return inflation to the 2% target.

The next few months are likely to be interesting times for the Bank, and not necessarily in a positive sense. If inflation indeed moves steadily lower and the economy grows only sluggishly, it will be difficult to justify ending the "conditional" pause. Concerns over excessive household indebtedness further add to the desirability of avoiding further rate hikes. 

However, the renewed signs of hawkishness at the Fed could severely limit the Bank's options. The overnight target is already below the Fed funds rate. A 50 basis point hike by the Fed on March 22, particularly if it is accompanied by strong indications of more such moves in the future, would likely put pressure on the exchange rate, which would soon translate into higher price pressures in Canada. For now, the Bank is likely minded to keep rates unchanged at its next Governing Council meeting, but by the time that meeting comes around (on April 12) it may be facing a very different situation.   

Humphrey-Hawkish

Fed Chair Jerome Powell's semi-annual Monetary Policy Report to Congress, delivered to the Senate Banking Committee this morning, put paid to any notion that the Fed thinks it is nearing the end of the current tightening cycle. Market expectations are growing that the next rate move might be another 50 basis points. The recent switch away from expectations of a "pivot" has been remarkable to behold, given that most measures of inflation seem to be heading lower. 

The first full paragraph of Powell's testimony basically spells out his full message:

My colleagues and I are acutely aware that high inflation is causing significant hardship, and we are strongly committed to returning inflation to our 2 percent goal. Over the past year, we have taken forceful actions to tighten the stance of monetary policy. We have covered a lot of ground, and the full effects of our tightening so far are yet to be felt. Even so, we have more work to do. Our policy actions are guided by our dual mandate to promote maximum employment and stable prices. Without price stability, the economy does not work for anyone. In particular, without price stability, we will not achieve a sustained period of labor market conditions that benefit all.

That last sentence is worth contemplating. It seems as if Powell is saying that the Fed needs to increase unemployment in order to achieve a healthy employment market. It's reminiscent of the famous statement by a US military officer in 1968, after the devastation of the Vietnamese town of Ben Tre: "It became necessary to destroy the town in order to save it".  This tick-tock of the question period following Powell's opening remarks, indicates that Senators, led by Elizabeth Warren, were largely unimpressed.

It is disappointing, if not entirely surprising, that the Fed is showing no sign of rethinking its policy approach. The statement that "the full effects of our tightening so far are yet to be felt" is part of the its  now-standard acknowledgement that monetary policy operates with considerable lags. Yet it should be recalled that CPI inflation peaked in June 2022, mere months after the start of the current tightening cycle. Does this mean the lags are not as long as the Fed thinks, or does it mean -- perish the thought -- that the decline in inflation over the past six months and more is not actually the result of the Fed's actions at all?

The Fed's approach is largely based on the notion that unemployment and inflation are inversely related -- the so-called Phillips curve concept, based on a sixty-year-old academic paper that even your aged blogger recalls reading as an undergrad. This approach might possibly work when inflation is being driven by wage pressures, but that in no way describes the current situation. As is widely acknowledged, even by the Fed, wages have been rising more slowly than prices throughout the recent cycle.  

The Fed's response to this -- to quote Powell, "Although nominal wage gains have slowed somewhat in recent months, they remain above what is consistent with 2 percent inflation and current trends in productivity." has some validity. However, it begs the question of just how high rates (and unemployment) might have to go to achieve the desired effect on measured inflation, given that monetary policy is not attacking the root causes of current price pressures.  The "dot plot" released after the next FOMC meeting on March 22 is likely to show an expectation that the funds target will peak at 5.5 percent or even higher, and stay at that level well into 2024 or even beyond.

By way of Canadian content, note that Powell's testimony came just a day before the Bank of Canada's rate decision, set for March 8. Markets are fully convinced that the Bank will keep rates on "conditional" hold this time. However, with the Fed sounding more hawkish by the day, there are concerns that the Bank will not be able to decouple its actions from those taken by the Fed for very long without adverse consequences, particularly for the exchange rate. The Bank's recent move to the sidelines was strongly influenced by a desire not to tank the heavily-indebted consumer sector. Governor Macklem and his colleagues will be hoping fervently that the Fed's bark turns out to be worse than its bite,