In this week’s EconMinute, we’re talking about a very hot topic: interest rates.
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All eyes are on the Bank of Canada, and other central banks around the world, to see if they can stomp out inflation without bringing on a recession. A tall order, to be sure.
Since COVID, the Bank of Canada and the U.S. Federal Reserve have been in lockstep—first, supporting the economy, and, then, raising rates to bring inflation to a heel—until now.
On January 25th, the Bank of Canada stated it would be taking a “conditional pause” on further increases. One week later, the U.S. Federal Reserve doubled down on the need for more.
Here is a timeline of the two central banks:
- In March 2020, both slashed rates from normal levels of around 2% to near-zero to support the economy.
- For the next two years, both banks kept rates near zero.
- Last year, the banks shifted gears from supporting the economy to slowing it down by making it more expensive for consumers and businesses to borrow.
- At first, it was mainly a matter of returning to normal: both indicated extreme support was no longer needed. However, by March, both conceded inflation was more of an issue than expected, and they would need to do more. Both proceeded to raise rates aggressively: from near-zero to over 4%.
- Most recently, the two banks faced the question of when enough is enough.
- Technically, they made the same policy move: a modest 0.25% increase.
- But while the Bank of Canada said this could be the end, the U.S. Federal Reserve said to expect “a couple” more.
Is the Bank of Canada calling a (possible) end to the war on inflation too soon? Maybe. Federal Reserve Chair Jerome Powell seems to have suggested as much. But, with higher consumer debt and an economy more affected by the moves of others, there may be good reason for the two to differ. Nonetheless, only time will tell.