Uncertain recovery keeps central banks in neutral
OTTAWA — Saying there is still slack in the economy and that employment remains weak can hardly be seen as pointing to sustained recovery around the corner.
As for the threat of inflation? Call it transitory and move on.
The top central bankers in Canada and the United States are stuck in hurry-up-andwait mode, judging by what Janet Yellen had to offer U.S. law maker son Tuesday — and likely much of the same will come on her second day of testimony on Wednesday.
Many of the U.S. Federal Reserve chairwoman’s comments could have a similar ring to what Stephen Poloz is expected to deliver Canadian markets Wednesday, when the Bank of Canada governor announces the bank’s latest interest rate decision and releases its quarterly Monetary Policy Report of economic forecasts.
Poloz “has got enough data statistics he can point to to say, ‘Yeah, things are not picking up as much as we would like, if at all. And there are some growth risks on the horizon,’ ” said Benjamin Reitzes, senior economist at BMO Capital Markets.
“Even if (Canadian) inflation has picked up a little now — and if we don’t get growth in the future — it doesn’t really matter. … Inflation is going to slow down if we don’t get growth picking up.”
As for Yellen, “she was very wishy-washy” in comments made before the U.S. Senate banking committee, “and kept it as vague as possible,” Reitzes added.
In other words, “as conditions improve, then they’ll be willing to move. But until they do, they aren’t going anywhere. And that’s exactly right.”
The Fed’s key policy lever, the federal funds rate for lending between institutions, has been at an all-time low of near-zero since December 2008.
Given the still-uncertain outlook, U.S. economists are not budging on their stance that borrowing costs will not be heading higher until next summer.
And while the Fed has signalled its bond-buying stimulative program — once as much as $85 billion US a month, now reduced to $35 billion US — could wrap up by the end of October, all the necessary signs of recovery are not there yet.
“We have in the past seen sort of false dawns, periods in which we thought our growth would speed, pick up and the labour market would improve more quickly and later events have proven those hopes to be unfortunately over-optimistic,” Yellen said in Washington.
“We need to be careful to make sure that the economy is on a solid trajectory before we consider raising rates.”
The U.S. economy — the largest in the world — experienced a disastrous first quarter, hampered by severe weather conditions that resulted in a 2.9-per-cent contraction in output, the biggest decline in five years.
Many forecasters, however, expect data will show renewed growth of about 2.3 per cent in the April-to-June period.
Employment has shown more resilience, adding more than 280,000 jobs in June and pushing the unemployment rate to a six-year low of 6.1 per cent.
“The way (Yellen) characterized the labour market was still as having exceptional slack and she didn’t really sound in any rush, as some Fed officials have, to signal that the Fed is anywhere near raising rates,” Reitzes said.
Avery Shenfeld, chief economist at CIBC World Markets, said “as far as the timing of rate hikes, (Yellen) comes down evenly on both sides of the fence, saying they could occur sooner and more rapidly, or ‘more accommodative than currently anticipated’ — depending on how the labour market performs.”
Canada is dependent on that performance, but policymakers are still waiting for an economic wave in the U.S. to lift output and employment here.
Meanwhile, the Bank of Canada will update its domestic and global outlooks on Wednesday.
In April, policy-makers predicted annualized firstquarter growth of 1.5 per cent.
As it turned out, the economy edged ahead by only 1.2 per cent between January and March. For the second quarter, the central bank has forecast 2.5 per cent growth. That will likely be adjusted in Wednesday’s report, and there is a chance its forecast for inflation — which policymakers target at two per cent — will be adjusted.
What will not be changed is the bank’s trendsetting lending rate, which has been at a near-record low of one per cent since September 2010, although Poloz and company might abandon their neutral stance on the next direction of rate movements.