To sum up Federal Reserve Chair Jerome Powell’s Senate testimony when it came to America’s path toward an interest rate cut: progress good, need more data. ¯\_(ツ)_/¯
But Powell had a second message in his remarks, in which he stressed the bank’s independence ahead of the next presidential election. Central banks everywhere find themselves in the political cross hairs. How big is the threat, and what’s at stake? We’ll unpack the growing tension between populism and policy makers below.
In the news
- Ticketmaster customers criticize the company over belated response to massive privacy breach
- Political paralysis sets in as France says au revoir to its previously business-friendly agenda
- Ontario’s supply chain for alcoholic beverages has been thrown into confusion by the LCBO strike
Up top
Pork chop
It wasn’t long ago we were telling you about the case of the disappearing Canadian stock market listings. Now the TMX is slated to get a new addition, albeit one some investors are already well familiar with. As Kate Helmore reports, Maple Leaf Foods is spinning off its pork business into a separate public company. Maple Leaf will continue to hold a 19.9-per-cent stake in the new, as yet unnamed company.
Pork hasn’t been a stable business for a while now, with exports swinging wildly as the industry got caught up in a diplomatic fight with China, and the pandemic upended commodity supply chains. This move will allow Maple Leaf to focus on its packaged food, prepared meats and plant protein businesses. As for whether the new standalone pig business flies with investors, we’ll have to see. The split isn’t expected to be finalized until early 2025.
All of that aside, the big question for me is what will happen to Maple Leaf’s recently opened Bacon Centre of Excellence. I’m assured by Kate it’s staying put. Mmmmm bacon.
In focus
Independence flay
Chair of the Federal Reserve Jerome Powell testifies during a Senate committee hearing on Tuesday.Bonnie Cash/Getty Images
In Jerome Powell’s testimony yesterday, he talked up central bank independence as a force for good, saying “the record is pretty clear” that allowing the central bank to do its job without political interference “serves the public well.”
As if on cue, the first question Powell faced from senators started with “Former president Trump ...”
With populist politicians seemingly on track to win on both sides of the border, I reached out to my Globe economics colleague Mark Rendell, who covers central banks, about how their independence may be tested.
So Mark, why does this question of central bank independence keep coming up?
When inflation is mild, interest rates are low and the economy is humming along, most people can happily ignore the Federal Reserve or the Bank of Canada. Now, of course, is not one of those times. We’ve just gone through the biggest surge in inflation since the 1980s. Interest rates are at the highest level in 20 years. That double whammy has eroded wages, then pushed up the cost of monthly mortgage payments. Ouch!
In other words, central bank choices – their successes and failures – have a huge impact on people’s lives. That makes the unelected technocrats that run monetary policy a prime target for criticism from across the political spectrum, and grandstanding by politicians who want to be seen as standing up for the little guy.
The problem is that monetary policy is all about hard decisions. When the economy is running hot and unemployment is low, central bankers raise interest rates to slow things down to keep inflation in check. Show me a politician willing to make that decision.
Has central bank independence been challenged?
Not really since the 1960s when prime minister John Diefenbaker and Bank of Canada governor James Coyne got into an almighty tussle, that ultimately led to Coyne’s resignation.
In recent years Canadian politicians have tip-toed up to the line, but have not, for the most part, done serious damage to the principle of central bank independence.
Last summer, three provincial premiers wrote to Governor Tiff Macklem asking him to stop raising interest rates. Macklem responded with his own cease-and-desist letter, warning that “requests from elected officials about how we should set interest rates could create the impression that the Bank of Canada’s operational independence is at risk.”
A more concerning comment came from Finance Minister Chrystia Freeland, who called the bank’s decision to stop raising interest rates last July a “welcome relief for Canadians.” This was seen as a more serious breach of protocol, as the Finance Minister has the power to give instructions to the central bank governor.
Questions about central bank independence are bound to arise if Conservative Leader Pierre Poilievre becomes prime minister. He has been a vocal critic of Macklem, and during his 2022 leadership campaign, he vowed to fire the governor. Poilievre has since gone quiet on the issue – perhaps tacking to the centre rather than playing to his Bitcoin-loving supporters.
Former U.S. president Donald Trump, who preferred a low-interest-rate, let-it-rip approach to monetary policy, got into several tussles with Fed chairs Janet Yellen and Jerome Powell. Watch for more fireworks if Trump is back in the White House this fall.
What would happen if a politician followed up on their threats and interfered?
In Canada, the finance minister is technically allowed to tell the Bank of Canada governor what to do with a written order, published in the Canada Gazette. This is considered a nuclear option, and no finance minister has ever pressed the button. Faced with such an explicit breach of central bank independence, it is generally assumed that the governor would resign, sparking an economic crisis. Politicians and central bankers may not always see eye to eye, but few would want to risk a full-on meltdown.
Charted
Help a lot less wanted everywhere
The Organization for Economic Co-operation and Development’s latest employment outlook, released on Tuesday, included a look at how wildly job markets have swung in economies around the world since 2019. As the worst of the COVID-19 pandemic eased, demand for workers soared and sent job vacancy rates into the stratosphere, only for that trend to reverse as economies began to slow. Canada experienced one of the starkest reversals during the period covered by the chart, which ended in the fourth quarter of 2023. From its peak, Canada’s job vacancy rate was down more than 40 per cent. Only Luxembourg and Portugal had bigger drops. Since then vacancies in Canada have all but returned to prepandemic levels.
The outlook
On our radar and reading list
Zoom in: It’s a relatively quiet day for earnings. In the United States, WD-40 Co. (yes, the lubricant spray) reports.
Zoom out: Next up for Powell, America’s top central banker testifies before the House.
On the lam: Have you seen this hedge fund manager?
More of this please: Haida Gwaii gets a newspaper back after a four-year absence.
Markets this morning
Global stocks advanced after the Fed chairman Jerome Powell’s cautiously encouraging comments buoyed hopes that interest rate cuts could start as early as September.
On Wall Street, Nasdaq and S&P 500 futures pointed higher while Dow futures were flat. TSX futures were lifted by higher oil and precious metal prices.
Overseas, the pan-European STOXX 600 was up 0.58 per cent in morning trading. Britain’s FTSE 100 gained 0.61 per cent, Germany’s DAX added 0.67 per cent and France’s CAC 40 rose 0.79 per cent.
In Asia, Japan’s Nikkei closed 0.61 per cent higher, while Hong Kong’s Hang Seng declined 0.29 per cent.
The Canadian dollar traded at 73.33 U.S. cents.