Central banks talk about inflation, but are they losing credibility when interest rates don't budge?

Both the Bank of Canada and the U.S. Federal Reserve saythey are really, really going to raise interest rates very, very soon.

But in separate news conferences on Wednesday they made it clear that neither of them are readyto do it just yet.

With the Canadian dollar surging above 80 cents US last week, there were a lot of people convinced thatTiff Macklem,governor of theBank of Canada, was going to move first and hike rates this week. He didn't.

The delay in a Canadianrate hike that so many had expected wasdescribed by one analyst as a "policy misstep" that could fan the flames of inflation and the housing market.

A reporter at the Wednesday news conference askedMacklem if he had lost the confidence of Canadiansafter his predictions about inflation proved wrong.

Waiting for the Fed?

But rather thantaking radical market-moving action,both Macklem and his counterpart at the U.S. Federal Reserve, Jerome Powell, acted in a way that seemed intended to broadcast a loud "remain calm." And both focused on the strength of the North American economy.

Wild swings in global share markets seemed to show traders were convinced Powellwas going to make a significant announcement of his own. With few exceptions, Powell just reiterated the Fed'splan that hepreviously announced in December.

While Powell nodded to the recent market turmoil with a reference to "financial stability," he said it didn't worry him because banks, businesses and households were in excellent shape. Central bankers insist their actions are solely focused on those kinds of measures, known as the real economy.When they talk at all about short-term swings in currency or security markets, they like to say it is not their job to consider such things.

While Macklem may not like to talk about the loonie, people as savvy as the governor's advisersat the Bank of Canada understand the economic impact of a rising Canadian dollar on trade if Canada starts raising interest rates too much in advance of the United States. That may have left the impression that Macklem is waiting to be sure that the Fed is actually planning to hike before making a move of his own.

But of course, that was not the reason Macklem gave for a delay. In fact, he said it was not a delay, merely a chance to give Canadians full warning that rate hikes are on the way, and he hopes they will not damage Canada's strong economy. He also mentioned ongoing uncertainty about the effects of Omicron.

Despite the lingering pandemic, one of the most important indicators of strength in both Canada and the United States was the startling health of the job market.

Hikes won't threaten labour market

While some parts of the Canadian economysuch those that depend on tourism may not feel it yet, said Senior Deputy Governor Carolyn Rogers, who appeared at Wednesday's monetary policy announcement for the first time since her appointment last year, evidence from the country as a whole was overwhelmingly positive.

"We look at a broad range of indicators and overall what we observed is that employment participationrates are back up to near pre-pandemic levels, there's pressure on wages, and employers are havinga hard time finding employees for a high level of vacancies," Rogers told reporters at Wednesday's news conference.

"So in total, those things say to us that the labourmarketis tightening and slack is absorbed," she said.

Powell had a similar good news story from the United States, insisting that the job market was so strong it was unlikely to be damaged by higher interest rates that are still expected some time later this year.

"I think there is quite a lot of room to raise interest rates without threatening the labour market," Powell told U.S. financial reporters.

But exactly when would the Fedraise rates and how quickly? Despite widespread belief hikes will come in March, and despiterepeated requests from reporters, Powell was careful not to specify.

When? That's hard to predict

As he said in December, the U.S. central bank willsmoothly taper offits purchase of bonds continuing but slowing theprocess of quantitative easing that the Fedhas used to stimulate the economy ending that process in March. From what the central bank has said in the past, that will open the way toraising interest rates, something that Powell expects willbe necessary later this year.

"It is not possible to predict with much confidence exactly what path forour policy rate is going to prove appropriate," said Powell in response to a reporter's question.

At the Bank of Canada news conference, Macklem was a little more forthright.

"The emergency measures needed to support the economy through the pandemic are no longer required," said Macklem. "Interest rates need to increase to control inflation. Canadians should expect a rising path for interest rates."

WATCH | How economists are reacting to Bank of Canada decision:

Bank of Canada surprises by holding key lending rate at 0.25%

2 years ago

Duration 3:18

The Bank of Canada has decided not to raise its benchmark interest rate just yet. Many economists had predicted an increase today due to inflation, which is now running at a 30-year high of 4.8 per cent.

Currency traders whorecently seemed certain the Bank of Canada would raise rates at this meeting are now betting Macklem and Rogers will make their move at the next one. But Macklem did not make any promises.

Both Macklem and Powell said they foresaw sky-high inflationdeclining over the coming year. Powell, who had suggested last month it would be back in the two per cent target range by the end of 2022, hedged a little, saying his guess now was that it would be a little higher. He suggestedthat supply constraints for somegoods could last into 2023.

Macklem gave an inflation figureof three per cent by year-end and actually made the optimistic suggestion thatthe prices of some goods could fall as the supply chain unkinks.

Unfortunately, while centralbankers try to sound confident on the path of inflation, a look at their track record does not inspire confidence. And whether Macklem will really demonstrate his independence and hike rates before Powell reveals a firm decision, that too remains uncertain.

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