National Issues

Economy—U.S. Federal Reserve, Interest Rates and the U.S. Economy—GDP for November—Alberta Oil Production Curtailment

U.S. Fed, Interest Rates and U.S. Economy

Background to the Decision

The tone and substance of the announcement made yesterday by U.S. Fed Chair Jerome Powell differed markedly from the one he made after the December 19 meeting of the Fed’s Open Markets Committee. On that date, Powell announced that the Fed was raising rates so that they would range between 2.25% and 2.50%.

There was also a hint that perhaps there would be two hikes in 2019 and then one in 2020 as the Fed, like the Bank of Canada tries to get back to what it considers normal for interest rates after years of low rates from the time of the 2008-09 depression. While Powell said at the time that there was no pre-set course for rate hikes he also said that the economy is growing at a strong rate.

This hike, if one remembers back, brought on the ire of President Trump who said on December 24, “the only problem our economy has is the Fed.” In response the Fed hit back saying “that “nothing will cause us to deviate from that [doing its job].” As Bank of Canada’s Governor Poloz has said many times it will be trying to get the balance right between stimulating growth and curtailing economic growth and causing a recession.

Then on Monday, January 14, Jerome Powell in a speech to the Economic Club in Washington attempted to clarify what the Fed would be doing in the future. He said that the Fed would be “patient and flexible” in determining when to next raise rates. He added “there is no pre-set path for rate hikes.”

He did speak again about the concern that by tightening credit too much the economy could be thrown into a recession. However, the underlying economy is performing just fine.

Powell also said that Trump’s criticisms were not having any impact on Fed decisions. Commenting on the effect of the government shutdown on the economy and the work of the Fed, he said “if we have a longer shutdown, I think that would show up in the data pretty clearly.”

That brings us to yesterday with the central bank of the United States faced with pretty much the same concerns as the Bank of Canada, except that the U.S. economy continues to grow.

Yesterday’s Decision

The decision yesterday was to maintain rates where they are after the December Fed meeting. Powell said the Fed would be adopting a “patient approach” to future rate increases. He said “the Federal Open Markets Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support a strong labour market and inflation near 2%.” The Fed also had nothing to say about “further gradual increases” in interest rates.

In fact speculation was that the next move could be up or down.

U.S. Economy

Commenting on the economy Powell said “the U.S. economy is in a good place and we will continue to use our monitoring policy tools to keep it there.” Solid growth is expected this year but at a slower pace than in 2018. There is uncertainty abroad so the Fed will rely on economic data for greater clarity on future hikes.

Some of those commenting on this decision of the Fed believe it is done with the hiking cycle. Economists had predicted that rates would not budge.

The data yesterday showed household spending growing strongly but business investment has moderated since early 2018. However job gains are strong with the economy “rising at a solid rate.”

The Fed statement regarding the future noted that its goal is to keep inflation at 2% and the Fed would be concerned if inflation is persistently above or below this target

Application to Canada

Yesterday’s announcement by Fed Chair Powell contained some of the cautionary wording contained in Governor Poloz’s interview last week at the World Economic Forum. Borrowing costs will be data dependent. The main difference is that Poloz is concerned about the housing market and the level of house hold debt. Another difference is that Canada’s economy is slowing down, the question is how much?

The good thing about Powell’s comments for Canada is the fact that the U.S. economy is forecast to continue to grow. This will benefit growth in Canada as there will be money to buy Canadian products. If exports rise because of this the Canadian dollar will strengthen.

Also with the Fed not raising rates, it takes some of the pressure off the Bank of Canada to hike rates to keep pace with the U.S. The Fed yesterday presumably signalled that it would not be raising rates again for a few months having seemingly abandoned its plan for two rate hikes this year. This theory will be tested when the Bank of Canada next deals with rates on March 6. In the meantime it will be collecting data, with one of the more important pieces coming this morning with GDP numbers for November.

GDP Numbers for November

The prediction is that GDP for November will shrink from that announced for October. It will be affected by plunging oil prices, the fallout from the U.S.-China trade war and the interest rate hike in October. Also the data feeding into today’s announcement is decidedly negative from retail sales, to manufacturing to wholesale sales. All were down from the previous month.

BMO Capital Markets is cutting its growth forecast to 1.2% which is below the Bank of Canada forecast for Q4. Benjamin Reitzes, senior economist at BMO is quoted as saying “the uncertainty around housing, trade and oil will take at least a few months to clear up.”

TD is now forecasting growth at 1% for Q4. The National Bank offered the opinion that the Bank of Canada should wait until the second half of 2019 to contemplate raising rates.

It is quite possible with the pressure from the U.S. to keep pace regarding rate hikes having now subsided and with slow growth, the Bank of Canada may hold off until summer allowing it to review the effect of its rate hikes over the last couple of years.

Alberta Oil Price Curtailment

Some positive news from the oil patch, at least as positive as it gets these days when most news is decidedly negative. The underlying problem that bedevils the oil patch, lack of pipelines to tidewater remains, but the oil glut that resulted in falling prices and widening price differential between Western Canadian Select and West Texas Intermediate seems to have been addressed by the output curtailment that went into effect on January 1.

This was the view offered yesterday by Premier Notley who announced that in February and March production limits would be hiked by 75,000 barrels per day. This means production at 3.63 million barrels per day. Notley said “we’re not out of the woods yet, but this temporary measure is working.”

Not everyone is happy as CNRL is concerned that the new rules are discriminatory taking a larger cut out of its share of production. This could result in job losses.

The provincial government is still pursuing the purchase of rail tanker cars in order to get oil to tidewater. Given the remarks from Natural Resources Minister Sohi in response to questions by Vassy Kapelos on Monday of this week, it would seem that resumption of construction on the Trans Mountain pipeline is a long way off.

Notley says she is “going to work with industry to find the right balance” but with no additional pipeline capacity coming soon, balance may be difficult to achieve.

To Come:

–today, the Parliamentary Budget Officer presents his report on Canada’s purchase of the Trans Mountain pipeline

–today, Senior Deputy Governor of the Bank of Canada, Carolyn Wilkins delivers a speech to the Greater Toronto Board of Trade

–today, GDP numbers for November to be released

–today, CMHC Housing Market Assessment to be released

–February 4, Lima Group meets in Ottawa to discuss Venezuela

–February 5, State of the Union Address to be delivered

–February 5, International Trade Numbers for December to be released

–February 8, job numbers for January to be released

The Morning Brief returns on Monday, February 4 and will once again attempt to set out the agenda for question period–bc