Expecting What’s Unexpected In Canada

There is much more chicken to each hawk than any of the birds would care to admit. What I mean by that is fairly straightforward, or it should be. Alan Greenspan was resolute. Right or wrong (the latter, trust the curves), after taking federal funds down to 1% officials pushed the rate right back up to 5.25% without pause. At every meeting interval during the middle 2000s, the FOMC added another 25 bps.

There was no equivocation or lamenting R*’s and complicated repo mechanics. They may not have known what they were doing, but they at least believed in their own madness.

Janet Yellen began the same trajectory in the second year of her tenure. After taking almost all of 2016 off, the first Fed pause, she resumed with a conspicuously cautious attitude. QE was the most powerful monetary instrument ever unleashed, they said, but the economy that came from it couldn’t withstand more than three or four 25 bps hikes per year?

Sure.

Not only that, especially since 2017 policymakers have ratcheted up the rhetoric. The less they act the more they claim it is because the economy is too strong. Don’t bother about the contradiction, it’s another one of those aspects of Economics you aren’t meant to actually think about. Expectations policy was stripped of its rationality a long, long time ago.

The Federal Reserve isn’t the only central bank which has chosen the chicken. Our neighbors to the north in Canada, their central bank has followed in Yellen’s footsteps. Its head officials keep saying Canada is booming, very close to dangerously overheated inflation. Ever since July 2017, the Bank of Canada has been doing the 25 bps thing, too.

But not every meeting, you see. The ungodly strength of the Canadian economy couldn’t handle such regular rate hikes. Instead, five 25 bps increases have been spread out across thirteen policy meetings. That last one was all the way back in October.

The only time BoC did back-to-back was the first two in the middle of 2017.

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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