Fed banker likes the idea of gradual rate hikes over next two years.
FED BANKER FAVOURS GRADUAL RATE RISES OVER NEXT TWO YEARS AMID RAPID GROWTH
The Federal Reserve should continue to raise rates gradually over the next two years, a U.S. central banker says, with higher borrowing costs perhaps beginning to act as a brake on growth starting early next year.
The Fed is about three rate hikes away from reaching a “neutral” level, at which interest rates are neither adding to or taking away from economic growth, San Francisco Fed President John Williams told Reuters in his last interview before the Fed’s June policysetting meeting, when the U.S. central bank is expected to raise its target range for the short-term benchmark interest rate to 1.75 per cent to 2 per cent.
Neutral, Williams said, is probably around 2.5 per cent, meaning that rates above that level would likely act to slow economic growth.
“The notion that we are trying to stimulate growth to be beyond the longer-run trend ... that is no longer the relevant context of thinking of monetary policy once we get closer to neutral,” Williams said.
If the U.S. economy stays strong and inflation remains at or somewhat above the Fed’s 2 per cent goal, he added, “that could mean that interest rates go above neutral for a period of time.”
“I don’t view our policy path as just getting to neutral and saying, ‘OK we’re done’ ” he said.
The Fed currently describes its monetary policy stance as accommodative and includes in its regular post-meeting statement a promise to keep rates lower than otherwise “for some time.”
As rates rise, Williams said, that language is “no longer either accurate or ... really that useful.”
Asked if those words should be removed from the statement at the Fed’s next meeting, on June 12-13, Williams said it will be up to the policy-setting committee on the exact timing.
The Fed is expected to increase its target range for the short-term benchmark interest rate to 1.75 per cent to 2 per cent, marking the second of an expected three or four rate hikes this year. Forecasts released in March show Fed officials expect to deliver three more interest rate increases next year.
Williams said he is sticking with his view that the Fed should raise rates two or three more times this year and further next year.
On Friday a government report showed U.S. employers added 223,000 jobs in May, more than expected, and raised hourly earnings 2.7 per cent over a year earlier.
“Given that the labour market’s strong, growth momentum is solid, and the inflation data is showing that we are getting very close to or near our inflation goal ... we should continue the path that we are on, which is the gradual rate increases over the next two years,” Williams said.
The strong employment report added to a string of upbeat economic data, including consumer spending, industrial production and construction spending, that have suggested economic growth is regaining speed.
The New York Fed’s forecasting models suggest GDP is growing at about a 3.3 per cent annual pace this quarter; Atlanta Fed’s model points to a blistering 4.8 per cent pace of growth.
And there is likely more to come. A US$1.5 trillion income tax cut package and an increase in government spending is yet to filter through the economy, and is expected to boost growth, wages and inflation.
“It shouldn’t be a commodity. It’s considered to be a human right,” said Martha Friendly, an early childhood education researcher who founded the Childcare Resource and Research Unit.
She argues that private providers operate in the low margin industry of childcare and trim employee costs to pocket more profits, resulting in higher staff turnover and workers with lower qualifications. Her solution to high fees and wait lists rests with increased government spending, not private disruption.
Despite such opposition, private for-profit operations seem to be gaining market share.
Friendly’s research found a 10 per cent drop in the number of spaces provided by for-profit businesses from 1992 to 2004, when they made up just 20 per cent of the market, but a resurgence to about 30 per cent in 2016, the most recent year for which data is available.
Still, the industry remains heavily fragmented, divided among some 38,300 providers, with few running more than one location, according to IbisWorld’s report. No company holds more than one per cent of market share.
However, the report also suggests Canada’s handful of bigger providers, such as BrightPath Early Learning Inc. and Kids & Company, will continue to expand as they take advantage of higher demand thanks to more women joining the workforce, as well as more government assistance making out-of-home care more affordable for more families.
BrightPath operates more than 75 centres under several banners. It formed in 2010 under the name Edleun and was a publicly traded company until Busy Bees holdings Ltd., a U.K.-based childcare provider, acquired it in 2017. Kids & Company runs nearly 100 centres between six provinces and lists five more locations opening soon on its website. Both companies declined interview requests to speak about future expansion plans or how private companies could disrupt the daycare market.
As demand for affordable spaces continues to outstrip supply, some parents turn to tailor-made solutions, including nannies, relatives or staying at home themselves.
But the technology that has been such a disruptive force in other industries is likely years away from true daycare disruption.
There have even been experiments with automation.
Japanese researchers made headlines in 2016 after creating a childcare robot. They claim four robots and one human can care for more than 60 children together. Chinese robot maker AvatarMind is already shipping its iPal robot, touted as “a companion, educator and safety monitor for children,” in its home country and plans to soon release the product in the U.S.
However, a 2017 report on sectors poised to be taken over by robots from the McKinsey Global Institute found that educational services showed the lowest potential for automation.