Questions on inflation, jobs and housing reveal U.S. concerns on Canadian recovery
Bank of Canada boss Tiff Macklem is grilled on the path to pandemic recovery
Tiff Macklem faced some tough questioning on Thursday, as members of the U.S. Council on Foreign Relations grilled the Bank of Canada governor on whether their northern neighbour would have a trouble-free exit from the downturn of the COVID-19 pandemic.
Led by financier and former Democratic politician Roger Altman, members of the U.S. think-tank asked probing questions onwhether Canada's housing bubble would have any spillover effects on the global economy, as well as onjobs, inflation, commodity pricing and the difficulty of moving from a low interest-rate regime to one without monetary stimulus.
To Canadianswho have heardMacklem's views in the past,the answers were in some ways less revealing than the questions. But among the new things he did pass onwerefears that inflation could well turn out to be more long-lasting than expected and jobs recovery could be slower.
Inflation: blip or trend?
On the topic of inflation, Macklem responded to a question that conveyed a growing concern in the financial community that inflation was not a blip, but rather a trend.
"A lot of people in finance are learning that the most important word in the English language is 'transitory,'" quipped Altman, referring to the term repeatedly used by central bankersto imply that inflation would go away on its own.
"How confident are you that it really is transitory, because if you took a poll of smart people in financeyou'd probably get 50 per cent saying it probably is and 50 per cent saying it probably isn't," said Altman.
"It's the job of central banks to say it is," responded Macklemin a similarly humorous tone.
But both in the council session and at a later news conference, the bank governor conceded that inflation was runninghotter and could last longer than initially expected.
In August, Canada's inflation rate hit 4.1 per cent the highest level since 2003.
And as gasoline pump prices smash records, cars and appliancesare unavailable due to a shortage of component chipsandships back up at North American ports, Macklem said the inflationary path was not as simple as many had expected when signs of rising prices first emerged.
"We do expect thatwe will work through these supply disruptions, but I will say, they areprovingto be more complicated and they could last a little longer than we previously thought."
Slower jobs recovery
Macklem was, of course,speaking before Friday's latest jobs numbers in both Canada and the U.S. had been released. But he said the labour market was turning out to be more complicated as well.
Still, there were increasing signs that jobs forlower-wage workers, who often include recent immigrants, visible minorities and women, were coming back, he said.But the process had turned out to be slower than he hoped.
"I think what we're seeing here isit's more complicated to open an economy than to close an economy," said Macklem, using a similar line for both audiences.
"This process of companies finding workers and workers finding the right jobs, it's taking some time.
"What that means is that we do expect to see a good recovery in the second half of this year, but it could be a little slower, it could take a little longerthan we expected."
One thing commentators in the U.S. have noted is that a continued rise in jobs, if shown in Friday's employment numbers, will almost certainly force Macklem'sAmerican counterpartto begin the process of raising ratesand that may be disruptive to an economy that has grown accustomed to bargain-basement lending.
In another question, Altman alluded to the huge amounts of money sloshing through the system.
In the U.S., Europe and China, M2one measure of money supplywas up about 10 per cent, he said, because of government action. And the holding of bonds by the Bank of Canada, used to stimulate the economy, is up about 300 per cent, he said.
Exit pains
"One is tempted to think that the exit for central banks from this phase of extraordinary measures is going to be challenging, is going to be difficult," said Altman to Macklem. "Tell us how you see that being managed and how you think it can avoid being bumpy."
Macklemconceded there would "likely be some bumps" in the process. But one of the ways central banks could help, he said, was to be as transparent as possible and "minimize surprises."
That is what the Bank of Canada has done by signalling its plans to slow bond purchases in advance and warning it will begin raising rates before selling off its stock of stimulus bonds.
WATCH |Bank of Canada will 'control inflation,' Macklem says:
The same applied to the U.S. Federal Reserve in September when chair JeromePowell revealed the Fed was preparing to begin slowing bond purchases as soon as November.
Two more questions from think-tank members addressed questions of great importance to Canadians:housing and swings in commodity prices. But they indicated those subjects are also important to our southern neighbours.
One question askedwhether the effects of an unwinding of the Canadian housing market currently being used as "a retirement asset" was likely to spill across the border and do damage there. Macklemwas reassuring.
On the other question of commodity prices, he made an oblique reference to the potential distortions of the current rise in oil prices, alluding to the facthe could only set one interest rate for all of Canadawhich, in the past, has led to "Dutch disease" when oil prices surge.
In each of thecasesaddressedand in many otherswhat may seem like abstruse subjects of interest only to economists and market traders actually has important effects on each of ourlives, as Macklem succinctly noted.
"What happens in financial markets doesn't stay in financial marketsit has real impacts, it affects jobs and growth."
Follow Don on Twitter @don_pittis
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