Business Brief: Macklem vs. Powell

The Bank of Canada and the U.S. Federal Reserve are turning to a lengthy easing cycle that will bring down the cost of borrowing.

After holding lending rates at a two-decade high for two years, Fed chairman Jerome Powell recently said “the time has come” to start cutting – leaving little doubt that a drop is in store but some uncertainty over how far he’ll go at the bank’s meeting on Sept. 17. Parts of his speech might also be interpreted as a suggestion to his critics that his monetary policy was right all along.

But was it? Today, we look at why Bank of Canada Governor Tiff Macklem might have gladly switched seats with his U.S. counterpart at the beginning of the inflation battle.

In the news

Shopping around: Alimentation Couche-Tard Inc.’s departing chief executive officer says he is upbeat about future takeover opportunities after the convenience store chain announced its latest financial results, though it remains largely quiet on its potential blockbuster acquisition of 7-Eleven parent Seven & i Holdings Co., Ltd.

Battle on Bay Street: Canada’s banks are facing a flurry of competition from each other – a suddenly “ruthless oligopoly” that is putting unexpected pressure on profit margins, Royal Bank of Canada CEO Dave McKay said.

CIBC revamps leadership: The bank is making changes to its top executive team in another shuffle that shakes up the succession race to succeed chief executive Victor Dodig.

Steel: Haven’t found what it’s looking for. Nippon Steel’s acquisition of U.S. Steel is reportedly going to be blocked by the Biden administration, amid growing bipartisan political opposition to the US$14.9-billion deal.

Happening today

• Statistics Canada reports labour productivity for the second quarter.
• U.S. jobs data includes ADP employment report for July and initial jobless claims for August.
• In real life, the NFL season kicks off with a battle between reigning Super Bowl champs Kansas City Chiefs and the Baltimore Ravens. In fantasy football, the industry is projected to generate US$8.6-billion in revenue in the U.S. alone in 2024 – a 7-per-cent increase over last year.

Economy

Banking heavyweights: The tale of the tape

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Powell’s push

In a high-profile speech last month in Jackson Hole, Wyoming, Powell said he sees “strong underlying momentum” in the country’s economic growth even as recent data has painted a mixed picture.

In his brief remarks, he called out the analysts and economists who predicted that getting inflation under control would lead to a recession. “The time has come for policy to adjust,” Powell told an annual symposium for central bankers.

For a central banker, his following point is tantamount to throwing shade: Not only has inflation fallen as he kept interest rates high, but that drop came “in a context of low unemployment – a welcome and historically unusual result.”

Reading between the lines: “I was right. Haters gonna hate.” His policy of maintaining historically high interest rates played a part in taming inflation; the right conditions are now in place to make a cut.

But: If monetary policy is playing a decisive role in his continuing battle with inflation, the bank’s efforts seem to be falling short on its other mandate: “to promote maximum employment and stable prices.”

• America’s employers posted fewer job openings in July than they had the previous month, a sign that hiring could cool in the coming months.

And: Some critics say taking credit for the stabilization of inflation is easy to do because it’s hard to disprove, i.e. inflation has cooled since the spring as I became increasingly frustrated with the Toronto Blue Jays’ head office.

• Taking monetary policy out of the equation, the rise and fall of inflation could reflect a temporary squeeze on supply and demand through the pandemic, the argument goes.

Macklem’s debt pressures

At the beginning of the pandemic, the Bank of Canada Governor and Powell found themselves in similar circumstances. Both hiked rates to keep the cost of goods from rising beyond reach, both saw mixed results. Both are now pointing at a future of falling inflation. (Potentially to a concerning degree, Matt Lundy reports.)

But in Macklem’s case, the pain of lending-rate hikes was felt far more acutely among Canadians.

• Canada has the highest level of household debt to disposable income, reaching more than 180 per cent, compared with about 100 per cent in the U.S. and Germany.
• In the U.S., a 30-year fixed-rate mortgage is the most common mortgage loan option. Those homeowners don’t have to worry about renewals any time soon.
• While a 25-year fixed-rate term is possible in Canada, they come with a much higher interest rate. Most Canadian mortgage holders have a term of 5 years or less.

Charles St-Arnaud, chief economist at Alberta Central, told me Macklem likely received more criticism than the Fed on monetary policy amid its first rate hikes, “in part because there’s more pain associated to the higher interest rate because of the high level of debt.”

Verdict

St-Arnaud imagined a “parallel universe” where Powell was at the Bank of Canada in 2021 and Macklem at the helm of the Federal Reserve.

• “That would have been very interesting because I wouldn’t be surprised” if Powell wouldn’t have fared as well as Macklem.

David Doyle, head of economics at Macquarie Group, wrote in an e-mail that both Powell and Macklem are doing “solid jobs” given the different circumstances their economies have faced.

• “Some may criticize Macklem for not doing ‘more sooner,’ but the BoC remains constrained somewhat due to the overall stickiness of shelter inflation and wage growth relative to productivity.”

And James Orlando, a senior economist at TD Bank, noted that the bankers can’t be judged on decisions alone.

• “There is the communication impact and willingness to give forward guidance that determine central banker effectiveness.”

For all the ways we can measure economic performance, the impact of the narrative presented by policymakers is hard to quantify: My reporting after yesterday’s cut didn’t reveal a clear winner – only different dynamics, and possibly a different battle altogether.

Let me know what you think: cws@globeandmail.com

💡 Recommended reading: Rob Carrick presents a Gen Z guide to what central-bank rate cuts mean for investing, homebuying and emergency savings.

TIFF

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The strikes are over, the virtual screenings are behind us and the Toronto International Film Festival is back in full form for its 49th annual edition. The Globe’s most anticipated titles of 2024 include Saturday Night, which traces the 90 minutes leading up to the broadcast of Saturday Night Live’s debut episode.

• The most recent data available on SNL’s budget was from 2023, showing its 46th season cost about US$138-million to produce. The final season of Game of Thrones reportedly cost US$90-million.

Morning markets

Global markets were mixed as investors awaited more economic data from the United States and euro zone to gauge the outlook for interest rates. Wall Street futures were little change while TSX futures pointed higher as crude and metal prices advanced.

Overseas, the pan-European STOXX 600 slipped 0.31 per cent in morning trading. Britain’s FTSE 100 fell 0.14 per cent, Germany’s DAX advanced 0.12 per cent and France’s CAC 40 gave back 0.69 per cent.

In Asia, Japan’s Nikkei closed 1.05 per cent lower, while Hong Kong’s Hang Seng dipped 0.07 per cent.

The Canadian dollar traded at 74.02 U.S. cents.