For long-term borrowers, Jerome Powell of the US Federal Reserve had good news and bad news that could affect Canadians looking to renew their mortgages or make other loans.
The good news is that the US central bank is following the lead of the Bank of Canada and after 10 rate hikes in a row has decided to take a break and leave its reference rate at around 5.1 percent.
But the bad news was that, like Powell’s Canadian counterpart, Tiff Macklem, who paused rate hikes to resume them, the Fed is expecting more hikes this year, perhaps up to 5.6 percent. In the past, Powell had suggested that a Canadian-style break could be risky.
“We understand the hardships that high inflation is causing, and we remain strongly committed to bringing inflation back to our target of two percent,” the Federal Reserve Chairman said in his opening address. Powell said inflation hurts everyone and hurts the poorest and those on fixed incomes the most.
Delays and headwinds
Despite what he called the central bank’s main priority of bringing inflation back to the goal the Fed shares with the Bank of Canada, Powell and the committee that advised him decided to pause.
“In light of how far we have come in tightening policy, the uncertain time lags with which monetary policy affects the economy and the potential headwinds from credit tightening, we decided today to leave our policy rate unchanged,” Powell said. press conference on Wednesday. .
But he made it absolutely clear that it was a pause, not an end to rate hikes.
“Looking ahead, almost all committee members believe it likely that further rate hikes this year will be appropriate to bring inflation down to 2 percent over time,” he said.
For anyone who thinks US interest rate hikes stop at the border, it’s an unfortunate fact that while Canada’s short-term floating rate rises and falls at the Bank of Canada’s current policy rate of 4.75 percent, lenders offering long-term loans such as low-interest fixed mortgages insure them against the North American price of money benchmarked by the Fed.
Another way to think about it is that the Fed’s current interest rates mean that a lender can get more than a five percent return on safe U.S. Treasury bonds. Why would they take the risk of lending you for less money?
Taking off the patch
The other part of the bad news for borrowers is that from the key experts advising Powell, those “commission participants,” no one expects rates to fall this year. In fact, most expect interest rates to rise another half a percentage point over the next six months to reach 5.6 percent this year, which for many borrowers means mortgage rates are well above 7 percent.
At Powell’s press conference on Wednesday, reporters had two main questions. If Powell and his advisers thought they had more work to do to beat inflation, they just couldn’t do it. One reporter quipped in his question, “Why not just take the Band-Aid off and raise rates today?”
The other question was, if Powell was willing to wait for interest rates to take effect, why didn’t the Fed just wait a little longer? Powell had answers for both.
The pause, he said, would allow the central bank to take stock, collect information and give the economy more time to adjust. It’s generally accepted that interest rate hikes and cuts work with a lag, but Powell said research is inconclusive on this.
The pause also helped stabilize the banking sector, which had been wracked with turmoil following the failure of Silicon Valley Bank and two other US banks.
But why not wait any longer and wait for more lagging effects from the long string of rate hikes, Powell said the Fed was not yet convinced that inflation would continue to fall at current interest rates.
‘Not solved yet’
There were many good signs, he said. Growth began to slow down. Wages grew less rapidly and labor shortages appeared to be improving. The supply shortages that helped kick-start inflation in 2021 were getting better “but not yet resolved,” he said.
Powell said that while inflation had plummeted from 9.1 percent at its peak last June to 4 percent on Tuesday, there simply wasn’t enough evidence that prices continued to fall. He noted that core inflation — the rate without volatile things like gasoline removed — remained above five percent.
The current19:12Struggling Canadians face another rate hike
He feared that if people started to think inflation of four and five percent was normal, there was a danger that inflation would never fall to its target of two percent.
“If you look at the full range of inflation data, especially the core data, you just don’t see much progress over the past year,” he said.
Asked repeatedly what kind of evidence would convince him that rising prices had been overcome, he said, “What we would like to see is credible evidence that inflation is peaking and starting to fall. Of course, that’s what we want to see.”
Powell said that at a time when inflation soared above nine percent, it was essential for the central bank to raise rates sharply and quickly, even at the risk of overshooting. But now that the goal seems within reach, less urgency is needed.
“And ideally, by taking a little more time, we don’t get far past the level we need to get to.”