Powell’s warnings in Jackson Hole will propel Bank of Canada’s course, economists say

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Chairman of the U.S. Federal Reserve Board Jerome Powell The Fed spoke candidly at its long-awaited annual meeting to dispel any assumptions that the Fed may soon turn away from continuing aggressive rate hikes as rising inflation may have peaked. I was. Canada is in the same boat as the United States, and Powell’s words are a reminder that the fight against inflation is far from over and that economic pain lies ahead.

It brought together central bankers, monetary officials and academics from around the world. jackson holeWyoming, Wyoming – At the annual economic policy symposium, held Aug. 25-27, Powell made the point in a brief speech on Aug. 26.

“A one-month improvement falls far short of what the Commission needs to see before it is convinced inflation is declining. “It’s intentionally changing its policy stance to a level where it’s not,” he said.

Steve AmblerAn economics professor at the University of Quebec in Montreal told the Epoch Times: I think you have to follow it pretty closely.

“Otherwise, the risk is a depreciation of the Canadian dollar, which could exacerbate Canada’s inflation situation.”

This year, the US Federal Reserve (Fed) and the BoC both raised interest rates by 225 basis points (2.25 percentage points) between March and July.

Central bankers step up game plan

BMO Chief Economist Doug Porter said: “Frankly, this speech breaks little ground and is a stick against those calling for a quick Fed pivot, blink, or rate cut in 2023. played a role as a August 26 postscript.

Powell warned that higher interest rates could cost some jobs and slow economic growth.

“They will also bring some pain to homes and businesses. These are the unfortunate costs of keeping inflation under control,” he said.

Bank of Canada Governor Tiff Macklem attended the Jackson Hole symposium but did not make a presentation or speak to the media.

he said on August 16th national post An editorial that the BoC needs to slow down spending to allow supply to catch up with demand.

“Even if inflation fell slightly in July, the prices of more than half of the goods and services that make up the CPI [consumer price index] The basket is rising more than 5% faster. ”

Financial markets’ reaction to Powell’s remarks suggests that the Fed has begun pricing in higher interest rates for the long term.

The S&P 500 fell 3.4% on Aug. 26, its worst daily performance in more than two months, while the two-year Treasury bond fell 3.48% on Aug. 29, its highest since 2007, according to Deutsche Bank. recorded the highest yield.

Canada’s Toronto Stock Exchange is down 3.3% as of August 30 from its close on August 25, before Powell’s speech.

Government spending warning

“Inflation as the Fiscal Limit” study A paper by Francesco Bianchi of Johns Hopkins University and Leonardo Melosi of the Federal Reserve Bank of Chicago, presented Aug. 27 in Jackson Hole, argued that the ability of central banks to combat inflation is inconclusive. Debt is stable or declining.

“Coherent monetary and fiscal policies are needed to overcome post-pandemic inflation,” said the study authors.

“If fiscal authorities are perceived not to be fully responsible for covering existing fiscal imbalances, the private sector will expect inflation to rise to ensure national debt sustainability. I will,” Bianchi and Melosi wrote.

Fiscal sustainability means that the economy or debt as a percentage of Gross Domestic Product (GDP) has not continued to grow.

During the recovery from the pandemic, inflation surged well above the Bank of Canada’s high end of the 3% inflation target range and is now 7.6 percent.

The national debt is over $1 trillion, and the Fed still has no plans to eliminate the deficit, while government spending has fallen as pandemic assistance programs have been put into action.

Ambler explains: [the government] You can borrow it. ”

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Ambler said it would have a “negative impact on growth” if such an event occurred. This is because when interest rates rise, firms’ investment will be restrained, and firms will also try to raise prices.

The study warned of a “pathological” situation in which worsening fiscal conditions would lead to higher inflationary pressures if central bank interest rates were raised to curb inflation but were not accompanied by expectations of lower government spending. is.

“The result will be a vicious cycle of higher nominal interest rates, higher inflation, a sluggish economy and higher debt,” Bianchi and Melosi said.

The Bank of Canada is widely expected to raise interest rates again in September, leaving the federal budget at about $60 billion in April.

However, Canada’s Parliamentary Budget Officer (PBO) said in 2022: Fiscal Sustainability Report In July, current fiscal policy at the federal level was shown to be sustainable, but above it only four provinces – Quebec, Alberta, Saskatchewan and Nova Scotia – were sustainable.

But what appears to be improving the debt sustainability ratio is higher inflation, higher GDP and higher government revenues.

“After a year and a half or two years of high inflation, the real value of debt falls considerably,” Mr Ambler said.

Bianchi and Melosi discuss how the United States controlled runaway inflation in the mid-1980s when the Reagan administration “provided much-needed political support for Federal Reserve Chairman Paul Volcker’s anti-inflationary agenda.” It provides a historical example of how

Rahul Vaidyanath


Rahul Vaidyanath is a journalist for The Epoch Times in Ottawa. His areas of expertise include the economy, financial markets, China, and national defense and security. He has worked in Bank of Canada, Canada, Mortgage and Housing Corporation, Investment Banks in Toronto, New York and Los Angeles.