Poloz can take his time on rate moves

NAFTA impasse, cooling economy won’t spark immediate hike, says Gordon Isfeld

OTTAWA Stephen Poloz has often implied that he doesn’t give a hoot about what monetary direction the U.S. Federal Reserve is taking at any given time — Canada follows its own policy path.

Two different economies, two different mandates — or so goes the mantra of our central bank governor. And if, by chance, those policies meet in the middle, so be it.

Poloz has made a point of reminding rate watchers of the often-divergent courses taken by the two countries. During a recent news conference in Ottawa, the governor acknowledged that the key U.S. lending level “now is out in front of us, whereas we were more similarly situated — I would say — before the oil shock came along.”

The 2014-15 collapse in crude prices “had us cutting rates in the same year that the Fed raised rates, which does a couple of things: It just demonstrates how divergence can occur, and how an independent monetary policy needs to be directed at your objectives, not someone else’s.”

Right now, the Bank of Canada’s benchmark lending level is at one per cent, after two 25-point increases in July and September — ending a seven-year hiatus on rate hikes. Meanwhile, the U.S. central bank, with its current interest rate range at the one-to1.25-per-cent level, appears more than ready to continue pushing on and up, despite some possible economic bumps along the way.

Current talks on restructuring, or even scrapping, the North American Free Trade Agreement certainly top the list of concerns facing all participants in what could be protracted and heated negotiating sessions.

But more immediate issues are where U.S. and Canadian economies and policies are headed in coming months.

The Federal Reserve will soon be driven by Jerome Powell, who takes over as chairman in February, ending Janet Yellen’s short four-year reign at the U.S. central bank, and marking the first time since 1979 that a president has not given an incumbent a second term.

That’s unlikely to happen to the next U.S. central bank boss. The 64-year-old Powell, a Republican supporter, has been a Federal Reserve Board governor since 2012, one of seven board members, with his term running until the end of January 2024.

President Donald Trump made no secret during the

U.S. election campaign that he wanted to replace 71-year-old Yellen, a Democrat, although he later pulled his political punches somewhat, and acknowledged she had done some good work.

Yellen, nominated by Barack Obama, has been Fed chair since 2010, replacing Ben Bernanke at the end of his term. Her 14-year appointment to the board — whether as chair or a regular board member — would have also run until 2024, had she not recently announced her decision to resign once Powell is sworn in.

It’s likely too early to see a solid pattern of future U.S. and Canadian interest rate moves — dependent, as they are, on the flow of economic data. The Bank of Canada will issue its next rate decision on Wednesday, along with its quarterly Monetary Policy Report detailing domestic and global economic forecasts. A news conference will follow in Ottawa.

“With NAFTA talks not going well and the economy seeing some signs of moderating, there’s no rush for Poloz to hike again,” said Avery Shenfeld, chief economist at CIBC Capital Markets.

So far, the economies of both countries are performing much as expected — in other words, growing at a slower but more sustainable pace than previous quarters.

“Canada’s economy has cooled from the rip-roaring pace seen in the year to mid-2017,” said Benjamin Reitzes, a senior economist at BMO Capital Markets.

As expected, gross domestic product slowed to 1.7 per cent on an annualized basis in the third quarter of 2017 from a revised 4.3-per-cent pace of growth in the previous quarter. Even so, year-over-year output is still “very healthy” at three per cent, Reitzes said.

U.S. economic growth is forecast at 2.4 per cent overall in 2017, following output of 2.1 per cent last year. GDP will likely ease back to 2.1 per cent in 2018.

Meanwhile, “defying the recent slowing in the economy after a stellar year, Canadian businesses are on a hiring splurge. Employment surged 79,500 in November, eight times more than expected, and more than double the prior month’s hearty pace,” said Sal Guatieri, BMO senior economist.

“Given the GDP reports are more or less in line with the BoC’s thinking, (the) employment report will likely loom much larger for policy-makers, as it’s clear that labour market slack is diminishing in a hurry.”