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Federal Reserve Chair Jerome Powell testifies during a U.S. House Oversight and Reform Select Subcommittee hearing on coronavirus crisis, on Capitol Hill in Washington, U.S., June 22, 2021.
25 or 50? Jobs report likely to influence magnitude of Fed’s rate cut
Background: Unemployment has risen for four months in a row and is up almost a percent from its lows last year, which, according to Eurasia Group’s global macroeconomics expert Babak Minovi, is worrying because “rises in unemployment like this usually go hand in hand with recessions, and that’s certainly not our (or the market’s) base case.”
Why it matters: Fed Chair Jerome Powell has put the labor market at the heart of the central bank’s decision on when and how quickly to ease interest rates.
“Economists are expecting unemployment to stop its losing streak in August with a modest recovery, but another surprise worsening would be a warning sign to the Federal Reserve that the US economy is slowing down faster than intended,” says Minovi, who believes that under this scenario the Fed would cut interest rates by 50 basis points from its current 5.5% target rate, as opposed to 25. But, if the unemployment rate does improve as expected? “Markets will breathe a sigh of relief — for the time being,” says Minovi.
Bank of Canada Governor Tiff Macklem takes part in a news conference, after cutting key interest rate, in Ottawa, Ontario, Canada July 24, 2024.
The Bank of Canada cuts interest rates again. Will the Fed follow?
After becoming the first central bank in the G7 to cut interest rates back in June, the Bank of Canada lowered rates again on Wednesday, by 25 basis points to 4.5% — and suggested there may be more cuts to come.
In its decision, the bank noted that global growth is expected to proceed at around 3% and that inflation is expected to cool gradually. It also noted that in the US, where the economy has remained hot despite inflation, “the anticipated economic slowdown is materializing, with consumption growth moderating.” That’s sending US inflation — which hit its lowest point in 12 months in June — down as well.
According to a recent Reuters poll of economists, experts still expect two rate cuts — the current rate is 5.5% — by the Federal Reserve this year, with the first not coming before September. Those polled expect the Fed to leave rates unchanged at their meeting this month. But Fed officials have signaled that a rate cut is getting “closer.”
On Thursday, the Bureau of Labor Statistics reported that US GDP grew by 2.8% in the second quarter this year driven by, among other things, higher consumer spending while inflation sits at around 3% — data which bolsters expectations that the Fed will wait until September for a rate cut.
A drone view shows a flooded area in the aftermath of Hurricane Beryl, in Houston, Texas.
Hard Numbers: Doctors at a distance, US inflation falls again, Beryl barrels through insurers, Virginia bans smartphones in schools
670,000: Is there a doctor in the house? Maybe, but if you’re an Ontarian, you might have to travel. At least 670,000 residents of the province live more than 50 kilometers from their family physician, according to a new report. Meanwhile, the number of Ontarians who have no family doctor at all has risen by a third since 2020 to more than 2.5 million people.
3: Annual inflation in the US fell for the third straight month in June, coming in at 3%, down from 3.3% in May. That will give the Fed room to start cutting rates again soon, but popular perceptions of inflation persist. Polling earlier this spring showed that two-thirds of Americans consider high prices a top problem, even after months of declining inflation. Why? Because things cost significantly more than they did before the pandemic-driven price surge.
2.7 billion: Damage inflicted by Hurricane Beryl will cost US insurers at least $2.7 billion, according to initial estimates. The storm, which slammed into southeastern Texas on Monday, lashing the Houston area with heavy wind and rains, destroyed property and left millions without power. For more on how climate change is cooking US insurers, see our special report by Ian Bremmer here.
1.2 million: Virginia will limit or ban cellphone use in public schools, a move that would affect 1.2 million students. Earlier this summer, the Los Angeles city school system issued a similar ban, amid heightened attention to the ways that smartphone use by adolescents can interfere with learning and threaten mental health. In Canada, Alberta will soon join Quebec, Ontario, and British Columbia with a similar measure.
FILE PHOTO: Japanese Yen and U.S. dollar banknotes are seen in this illustration taken March 10, 2023.
How long can Japan prop up the yen?
Japan’s currency slipped to 160 yen to the dollar on Monday, its lowest rate since 1990, triggering a government intervention and threatening Prime Minister Fumio Kishida’s position.
Voters are frustrated by Japan’s high cost of living, but a change in leadership is unlikely to alleviate the pain. The heavily populated island has few fossil fuel reserves, and it must import food and energy from abroad. That means when the yen weakens, ordinary folks see their bills shoot up.
The government employed a short-term fix: selling dollar reserves and buying yen to boost it. But Eurasia Group analyst David Boling says there’s not much to be done about the root of the problem.
“The yen’s weakness is being driven by the interest rate differential between the US, which has high interest rates and high bond yields, and Japan, which is very low,” he says. “Money is moving out of Japan to capture those higher yields.”
It might be another nail in the coffin for the PM, who could be replaced at the Liberal Democratic Party’s leadership conference this September.
“Japan has to have a lower house election by October 2025, and so the members of the LDP will be thinking about electing a leader who can take them through a national contest,” says Boling.
A pile of money sitting on top of a table.
No rate cut for Biden or Trudeau
It looks like neither Joe Biden nor Justin Trudeau can count on lower interest rates to give them the economic or political boosts they need.
In the United States, hopes for a rate cut were dimmed when Wednesday’s consumer price index numbers dropped. The index was up 3.5% in March compared to last year, higher than February and higher than expected, which means the Federal Reserve is unlikely to cut rates in the US anytime soon.
The Bank of Canada, meanwhile, held its benchmark rate steady for the sixth straight time on Wednesday, but Bank of Canada Gov. Tiff Macklem offered room for hope. “We need to be sure this is not a temporary dip in inflation,” he said, noting that a rate cut in June is still possible.
Both Biden and Trudeau desperately want inflation to ease and for interest rates to drop – to ease cost-of-living concerns for voters.
On Tuesday, former Bank of Canada and Bank of England Gov. Mark Carney – notably considered a potential successor to Trudeau – said the era of steady low-interest rates may be over because of structural changes – namely greater volatility and the shift to a low-carbon economy.
This perspective will be a cold comfort to the Biden and Trudeau camps as they face the prospect of asking for votes while mortgage rates, grocery, and gas bills remain high.
Republican presidential candidate and former President Donald Trump reacts during a campaign rally in Rome, Georgia, on March 9, 2024.
Hard Numbers: Trump seeks funds, Happiness drops, Inflation vs. interest rates, Bad air quality news, Measle cases rise
1 million: The campaign of former President Donald Trump called on one million supporters Wednesday to donate money as he struggles under the weight of his legal woes. Earlier this week, Trump – who remains a billionaire in terms of assets – failed to secure a bond for a $454 million judgment in a civil fraud case. If Trump can’t come up with the cash, his properties could be seized by New York’s attorney general.
15: Bummed out? The Great White North slid to 15th place in the annual World Happiness Report, down from No. 13 last year. But it was still well above the US, which dropped from No. 15 down to No. 23 in 2024. The dips in both countries were largely driven by unhappiness among people under 30.
2.8: Canadian inflation unexpectedly cooled in February, raising expectations that the Bank of Canada will cut interest rates in June. The consumer price index rose 2.8% last month compared to a year prior, surprising analysts who expected a 3.1% increase. Still, economists still expect the BoC to keep interest rates steady at its next meeting on April 10.
93: The US and Canada are dropping the ball on air quality. According to a report published Tuesday by Swiss air-quality monitor IQAir, only seven countries met the WHO’s guidelines for air quality in 2023 — Finland, Estonia, Australia, New Zealand, Grenada, Iceland, and Mauritius. Owing to last year’s record-setting wildfires, Canada was deemed the “most polluted country in Northern America” – ranking No. 93 worldwide, while the US stood at No. 102.
31: Measles is making a comeback in Canada and the US, thanks largely to unvaccinated travelers. Canada has seen at least 31 cases of the preventable disease so far this year and is also dealing with a shortage of vaccines. Meanwhile, the US has already tallied more cases in 2024 than the 58 instances recorded last year.
A view of the skyline and buildings at Shinjuku district during sunset in Tokyo, Japan June 20, 2021.
Will Japan raise interest rates … to zero?
Japan’s central bank will debate a landmark interest rate rise next week that could bring interest rates to a staggering 0% after nearly a decade of negative rates.
As the saying goes, there are four types of economies: developed, underdeveloped, Argentina, and Japan. While most countries have been working hard to cool inflation, Japan has struggled with the opposite problem, deflation, since the 1990s. Lower prices at the grocery store are nice, but consumers pay for it on the other end: Businesses see revenues fall, struggle to pay their debts, and lower wages or downsize to break even (mostly the former in Japan). The economy stagnates and ordinary families suffer.
Tokyo started running 0% interest rates in 1999 and negative interest rates in 2016 – in other words, encouraging companies to borrow money and keep cash flowing through the economy. It’s helped drive recent inflation, currently around 2.2%, above the target of 2%.
But is it the right kind of inflation? The Bank of Japan wants to make sure price increases are being driven by consumers spending more, and not costs on the producers’ side, before they hike rates. There are some promising signs, including Japanese trade unions securing the largest pay increase in 30 years from Japan’s largest corporations.
“All eyes are on the annual wage negotiations that will wrap up this week,” says Eurasia Group’s Japan analyst David Boling. “The Bank of Japan wants to see strong wage growth before it scotches the negative interest rate policy.”
We’re watching how cautiously central bankers choose to tack — if the climb to zero looks too steep next week, they can always wait until their April meeting.
Federal Reserve Chair Jerome Powell testifies to the Senate Banking Committee in Washington, DC.
Central bankers forecast clouds, with a chance of rate cuts
The millions of homeowners who have seen their mortgage payments double in recent years would no doubt concur with Mark Twain in his assessment of bankers – as the type of people who lend you an umbrella when the sun is shining and want it back as soon as it starts to rain.
Hopes for a break in the monetary policy clouds were frustrated this week as two North American central bankers said that interest rate cuts remain some way off.
Tiff Macklem, governor of the Bank of Canada, said yesterday that the bank’s governing council decided that rates will stay at 5%, at least until it meets again in April, as inflation of close to 3% means underlying pressures persist.
“We need to give higher interest rates more time to do their work,” he said.
The same day, Jerome Powell, chair of the Federal Reserve, told members of the House Financial Services Committee that the Fed is on a “good path” to achieving the desired “soft landing” of a growing economy with inflation back to its 2% target but that further progress is not assured.
The notes of caution come despite both US and Canadian economies avoiding recession. The US economy grew at an annualized rate of 3.2% last quarter. Even Canada’s anemic 1% growth rate suggests monetary policy is working to relieve price pressures, without choking demand.
Macklem said he is confident rates are high enough and that the discussion has now shifted to whether they need to stay at their current level.
Both central bankers characterized future progress as gradual and uneven, as wage growth remains in the 4-5% range.
But the unspoken pressure is political. A Liberal government in Canada will hand down a federal budget on April 16, less than a week after the next governing council decision. The budget date all but rules out the central bank's April meeting as a possibility for a rate cut, given the prospect of inflationary federal government spending.
In the US, it is an election year, which puts inevitable pressure on the Fed from politicians who will have to face angry voters. Powell said he acknowledged the risks of waiting too long to ease monetary policy and the damage that might cause the economy. But he said he did not want to ease credit conditions too soon and see inflation re-accelerate.
Investors expect an initial rate cut in June. Fed officials last year projected three quarter-point cuts this year, but Powell said the Fed would like to see more data to increase confidence that inflation is moving down to 2% before reducing the policy rate.
The benchmark rate has been held in the 5.25-5.5% rate since July.
For cash-strapped homeowners and consumers, the post-inflation rainbow can’t come quickly enough.