{"id":3155,"date":"2023-08-29T11:03:55","date_gmt":"2023-08-29T15:03:55","guid":{"rendered":"https:\/\/canadianlending.ca\/brokers\/?p=3155"},"modified":"2023-08-29T11:03:55","modified_gmt":"2023-08-29T15:03:55","slug":"interest-rate-peak-are-we-there-yet","status":"publish","type":"post","link":"https:\/\/canadianlending.ca\/brokers\/interest-rate-peak-are-we-there-yet\/","title":{"rendered":"Interest Rate Peak: Are We There Yet?"},"content":{"rendered":"<p>&nbsp;<\/p>\n<p>&nbsp;<\/p>\n<p><span style=\"font-weight: 400;\">Canadian homeowners grappling with rising prices and mounting mortgage payments want to know when central banks will stop raising interest rates. The labour market may provide a clue.\u00a0<\/span><\/p>\n<h2><b>US Outlook<\/b><\/h2>\n<p><span style=\"font-weight: 400;\">US Federal Reserve chair Jerome Powell\u2019s remarks at the recent\u00a0 <\/span><a href=\"https:\/\/www.msn.com\/en-ca\/money\/other\/jerome-powell-s-jackson-hole-speech-highlights-central-bank-s-uphill-battle-to-rein-in-inflation\/ar-AA1fRRxq\" target=\"_blank\" rel=\"noopener\"><span style=\"font-weight: 400;\">Jackson Hole Economic Symposium<\/span><\/a><span style=\"font-weight: 400;\"> provide some insight into what central bankers are thinking.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">For the last 45 years, the Fed has invited central bankers, finance ministers, academics, and financial market participants from around the world to discuss economic issues facing the U.S. and other world economies. Federal Reserve Chairs have traditionally used this symposium as a forum for setting the tone for key monetary policy discussions.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">With market expectations split on a US rate hike before the end of the year, Powell delivered a balanced message with a view to leaving options open for committee members when they meet in September.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Key takeaways from Powell\u2019s speech:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The Fed will remain data dependent, with future actions taken according to inflation and economic activity measures.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The Fed is trying not to make the same mistakes of the 1970s. If inflation continues to move lower and the economy continues to grow, monetary policy will remain unchanged for the foreseeable future, with inflation (well) above the Fed&#8217;s 2.0 percent goal.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The Fed could tighten further if inflation stops declining, or if it accelerates again, <\/span><span style=\"font-weight: 400;\">Resilience in the economy comes with the risk of inflation reacceleration.<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">As of July, the annual rate of inflation in the US was 3.2%, well down from its peak of 9.1% in June of 2022<\/span><span style=\"font-weight: 400;\">, the highest level in four decades<\/span><span style=\"font-weight: 400;\">.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Inflation has been a global phenomenon, but the global economy appears to be softening based on the most recent<\/span><a href=\"https:\/\/www.pmi.spglobal.com\/Public\/Home\/PressRelease\/4c472ee8100142509dabf9b27df5074c\" target=\"_blank\" rel=\"noopener\"> <span style=\"font-weight: 400;\">JPM Global Manufacturing Purchasing Managers\u2019 Index<\/span><\/a><span style=\"font-weight: 400;\">. Only one-in-three economies (<\/span><span style=\"font-weight: 400;\">ten of the 30 economies for which data are available) reported an increase in output, and for half of those, the gains were marginal. Overall, <\/span><span style=\"font-weight: 400;\">price pressure has been receding, but further progress is required.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The Fed\u2019s challenge is understanding the lagging effects of the pandemic on top of the lags associated with monetary policy. This is evident in the US labor market where 9.5 million job openings are keeping the unemployment rate low. As noted by the Fed, inflation is currently more responsive to labour market tightness than it has been for several decades. Indeed, some economists believe the recent surge in inflation was the result of an exceptionally tight labour market. If that is true, it implies that labour market dynamics are critical to how inflation unwinds in this market scenario.<\/span><\/p>\n<h2><b>Canadian Outlook<\/b><\/h2>\n<p><span style=\"font-weight: 400;\">There is a similar story in Canada. The Bank of Canada has focused on the output gap, which measures the difference between an economy&#8217;s actual and potential output (gross domestic product, or GDP), to determine how inflation is trending. When the output gap is positive\u2014when actual output is higher than potential\u2014the economy is operating above its sustainable capacity and is likely to generate inflation.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Potential output is the maximum amount of goods and services an economy can produce when operating at full capacity (i.e. at full employment and utilizing all of its resources). While potential cannot be observed, it can be estimated. The Bank of Canada relies on these estimates in its policy setting.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Projecting potential GDP in the wake of the pandemic, however, has been particularly difficult. Many businesses were closed, workers have left the labor force, and employee-employer relationships have severed, so it may be some time before the productive capacity of the economy returns to where it would have been without the pandemic. As a result, potential GDP has not been a stable guidepost for the Bank.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Instead, the Bank has been focused on the labour market \u2013 unemployment, job vacancies and wages \u2013\u00a0 to determine if the labour market has been in excess demand or supply. While the Bank has not looked at whether unemployment needs to be higher to hit its inflation target, we can get a sense of this by looking at the non-accelerating inflation rate of unemployment, or NAIRU, which is the lowest jobless rate that won\u2019t accelerate inflation.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">While the Bank of Canada has not published a NAIRU estimate, CIBC recently <\/span><a href=\"https:\/\/economics.cibccm.com\/cds?id=aad8bf45-724c-4787-b250-efbe2c16b4d7&amp;flag=E\" target=\"_blank\" rel=\"noopener\"><span style=\"font-weight: 400;\">estimated<\/span><\/a><span style=\"font-weight: 400;\"> a NAIRU rate of 5.7% is consistent with stable inflation in the final years of the prior cycle (1997-2019). They note that job vacancies have been persistently higher in this current cycle; however, this source of potential wage pressure has been subsiding. The current job vacancy rate is close to its 3% pre-pandemic rate.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">CIBC\u2019s view is that \u201c[a} couple more quarters of soft job gains and an upward creep in unemployment rate should do the trick, or perhaps even less if job vacancies further ease and help cool wage pressures.\u201d<\/span><\/p>\n<p><span style=\"font-weight: 400;\">In summary, look to the labour market if you want to understand if the Fed and Bank of Canada have finished raising rates.<\/span><\/p>\n<p>&nbsp;<\/p>\n<p><b><i><img data-dominant-color=\"2c4d70\" data-has-transparency=\"false\" style=\"--dominant-color: #2c4d70;\" loading=\"lazy\" decoding=\"async\" class=\"not-transparent aligncenter size-full wp-image-2894\" src=\"https:\/\/canadianlending.ca\/brokers\/wp-content\/uploads\/sites\/3\/2023\/02\/768x500_FGBioBanner-16-Dec-22-jpg.webp\" alt=\"\" width=\"768\" height=\"500\" srcset=\"https:\/\/canadianlending.ca\/brokers\/wp-content\/uploads\/sites\/3\/2023\/02\/768x500_FGBioBanner-16-Dec-22-jpg.webp 768w, https:\/\/canadianlending.ca\/brokers\/wp-content\/uploads\/sites\/3\/2023\/02\/768x500_FGBioBanner-16-Dec-22-300x195.webp 300w\" sizes=\"(max-width: 767px) 89vw, (max-width: 1000px) 54vw, (max-width: 1071px) 543px, 580px\" \/><\/i><\/b><\/p>\n<p><b><i>Independent Opinion<\/i><\/b><\/p>\n<p><i><span style=\"font-weight: 400;\">The views and opinions expressed in this publication are solely and independently those of the author and do not necessarily reflect the views and opinions of any person or organization in any way affiliated with the author including, without limitation, any current or past employers of the author. While reasonable effort was taken to ensure the information and analysis in this publication is accurate, it has been prepared solely for general informational purposes. Any opinions, projections, or forward-looking statements expressed herein are solely those of the author. There are no warranties or representations being provided with respect to the accuracy and completeness of the content in this publication. Nothing in this publication should be construed as providing professional advice including investment advice on the matters discussed. The author does not assume any liability arising from any form of reliance on this publication. Readers are cautioned to always seek independent professional advice from a qualified professional before making any investment decisions.<\/span><\/i><\/p>\n<p>&nbsp;<\/p>\n<p>&nbsp;<\/p>\n","protected":false},"excerpt":{"rendered":"<p>&nbsp; &nbsp; Canadian homeowners grappling with rising prices and mounting mortgage payments want to know when central banks will stop raising interest rates. The labour market may provide a clue.\u00a0 US Outlook US Federal Reserve chair Jerome Powell\u2019s remarks at the recent\u00a0 Jackson Hole Economic Symposium provide some insight into what central bankers are thinking.\u00a0 &hellip; <\/p>\n<p class=\"link-more\"><a href=\"https:\/\/canadianlending.ca\/brokers\/interest-rate-peak-are-we-there-yet\/\" class=\"more-link\">Continue reading<span class=\"screen-reader-text\"> &#8220;Interest Rate Peak: Are We There Yet?&#8221;<\/span><\/a><\/p>\n","protected":false},"author":12,"featured_media":3156,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[5],"tags":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v22.4 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Interest Rate Peak: Are We There Yet? - Brokers | Real Estate Secured Mortgage Investments<\/title>\n<meta name=\"robots\" content=\"noindex, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Interest Rate Peak: Are We There Yet? - Brokers | Real Estate Secured Mortgage Investments\" \/>\n<meta property=\"og:description\" content=\"&nbsp; &nbsp; Canadian homeowners grappling with rising prices and mounting mortgage payments want to know when central banks will stop raising interest rates. 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