It’s over folks, the Federal Reserve has given up on raising rates to historical levels. The announcement was preceded by rumours and media opinions suggesting the old hike schedule was dead and buried. The Fed’s new schedule outlines no further increases in interest rates for the year of 2019. The next expected rate hike will occur sometime in 2020, if not in 2021. The extent of the Fed’s ‘retreat’ surprised many, given the central bank’s previous dedication to rebuilding its rate cushion to historical norms. The implication of this change will be massive.
The Fed’s decision will pressure the Bank of Canada to maintain a similar trajectory of rate pauses. This will be a boon to the present Canadian status-quo of high debt, ease of credit access, and real estate orthodoxy. There will be positives and negatives to this monetary policy shift. Several factors have pushed the Fed into this corner. For one, economic statistics in the U.S. are worrying policymakers. Home foreclosures are rising and real estate demand is slowing, GDP growth is beginning to falter, and fiscal and trade deficits are on the up. Employment gains have also slowed, in February, the U.S. generated only 20,000 jobs – less than Ontario alone.
Political pressure from the White House is also having an impact. Freed from the strains of the ‘Russian collusion’ narrative, Trump is free to enhance his harping on economic and trade issues. This was seen several days ago when he urged OPEC to increase oil production to buttress see-sawing U.S. stock markets. He has repeatedly criticized the Fed publicly and abrasively in a way that no President has since LBJ in the mid 1960s. These attacks and pressures on the Fed prompted a rare 60 Minutes interview where Fed Chair Jerome Powell outlined his views that he cannot be legally fired and that the Fed is concerned over the state of the U.S. economy.
The sudden dovishness of the Fed suggests that the underlying state of the U.S. economy is not as healthy as President Trump believes. If the economy is better now ‘then ever before’, than why is the Fed incapable of raising rates to historical averages of 3-5%? The BOC is unlikely to raise rates while they are being frozen in Washington, as this would soften up the Canadian economy and strengthen the dollar at the expense of Canadian manufacturers and exporters. Tembo’s prediction of an end to rate hikes from a slowing economy have come true.