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Canada Ups Inflation Fight Ante With Massive 100bps Rate Hike
After triumphing in a recent battle with COVID, Bank of Canada governor Tiff Macklem will likewise o
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yes this raises the odds of a 100 bps hike by the FOMC in July….. it is a race to raise rates now- the fallout is not going to be pretty…..
The markets don’t seem to think so, but an additional 125bps (75 + 50) isn’t going to do the trick; the Fed has more work to do.
Not sure if you’re referring to 100bps odds when you say “markets don’t seem to think so,” but if you are, markets do indeed seem to think so. After CPI, swaps priced a one-in-three chance of a 100bps move from Powell this month (84bps for the relevant contract).
That’s interesting. I was referring to the idea the Fed goes 125bs total over the next two mtgs — either 75/25 or 100/25 — and then pauses. I mean, that could happen — and might even be the most likely case — but I don’t see it being enough to get headline inflation down to 3% in any kind of “reasonable” timeframe.
Imagine that, Bank of Canada (yes I am a Canuck!) dictating (maybe too strong a word ?) interest rate policy for the Fed. The mouse that roared !
Given the global risk free rate is based on US bonds, any other form of debt needs higher yields. This move is more preemptive than dictating: if the Fed raises interest rates aggressively and other central banks fall behind, those other currencies plummet and inflation in those nations gets worse.
This is perhaps another display of US hegemony.
Low income workers haven’t seen real wage growth for 50 plus years. Inequality has been rising sharply in the US as a result of financialization. Now all of a sudden a few extra bucks an hour in nominal terms for the lowest paid workers is causing panic? The average CEO in the US earns 360 x the median salary (and in some cases a 1000+ multiple) – perhaps trim that and your company’s labor cost might not be rising too much and you won’t need to pass on higher costs to consumers. Central banks are trying to fight primarily-supply-side-driven-inflation by crushing demand, but the primary drivers of inflation are highly demand inelastic. Maybe rate hikes pull house prices down a bit, but rents may increase. I just don’t see how these rate increases are going to quell inflation. If the Fed is successful in quelling a wage-price spiral, surely that just means even bigger contractions in real wage growth and yet another death blow for low income households. Maybe I’m wrong, maybegoods inflation eases as oil and wheat have come down and there could be a reverse bullwhip effect from high inventories, maybe. But if that does slow inflation, it is nothing to do with the Fed’s rate hikes. Correlation does not imply causation. I wanted o end with an insightful comment but instead I’ll just say this whole thing is a mess and we really need to rethink monetary policy and what central banks are actually there for.