Fed vs. BoC: Who hikes first?

While the Bank of Canada doesn’t see a need to raise interest rates before the second half of next year and Federal Reserve policymakers have pointed to a late-2023 hike, CIBC’s top economist thinks the U.S. central bank will be forced to move first.

“In our forecast, a too-benign outlook for core inflation is a key reason why we see the U.S. central bankers having to move up the date for their first hike to just ahead of a Bank of Canada Q4 2022 tightening,” CIBC World Markets chief economist Avery Shenfeld wrote in a report released on Wednesday.

“Some of that is of course based on a forecast of the economic path ahead, over which reasonable people could disagree,” he added.

The clearest economic indicator in the monetary policy debate is inflation, Shenfeld argued, with the U.S. seeing “a much more dramatic resurgence” this year.

The year-over-year change in the core consumer price index — excluding the volatile food and energy categories — has been much greater south of the border: that measure hit 4.5% in the U.S. in June while hovering closer to 2% in Canada.

Canada’s deceleration last year during the worst of the pandemic was also greater, Shenfeld wrote, indicating that recent inflation figures are experiencing a bigger boost from base effects. A comparison of core consumer prices since February 2020 shows the pace of U.S. inflation has roughly doubled Canada’s, the report said.

Data on the two countries’ labour productivity are more difficult to compare, Shenfeld wrote, but Canada appears to be returning to pre-pandemic job levels faster than the U.S. Canada’s overall employment rate is higher, as is the ratio for prime-age workers.

However, Shenfeld suggested this could be related to different pandemic support policies; because Canada offered wage subsidies in addition to unemployment benefits, more firms retained workers during the downturn when output was weak.

“The contest for which economy is closer to being in need of growth moderating rate hikes doesn’t have as clear a winner as we would like,” the report said.

“If you’re a GDP-output-gap fan and a core inflation watcher, the U.S. would appear to be in the lead, but those favouring labour market slack indicators might argue for Canada. We’re in the former camp, but will leave it to our readers to form their own judgments.”

Mark Burgess

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Mark was the managing editor of Advisor.ca from 2017 to 2024.