Continued risks to a U.S. and Canadian economic recovery keep us guessing about interest rates
If everyone is so confident interest rates are going to go up in the autumn, why doesn’t U.S. Federal Reserve chair Janet Yellen just say they are going to go up in September? The answer is risk.
Before yesterday’s monetary policy statement from the Fed, released on paper without the benefit of an explanatory news conference, there was some speculation she would make that very announcement. But that’snot the way it turned out.
“The Fed effectively did this in 2004” — putting the markets on notice that a move would come soon — “shortly before it last embarked on a rate-increasing cycle,” said the Financial Times in an article anticipating the central bank’s latest pronouncement.
Seeking hints
But instead, the people who read each statement to glean the smallest hints about what the Fed will do next were disappointed about how little information it contained. There was a little optimism and a little pessimism but there was one sentence that summed up the gist of the538-word release.
“The Committee continues to see the risks to the outlook for economic activity,” said the statement unanimously agreed upon by Yellen and her advisors.
As Prime Minister Stephen Harper and the industry he championed discovered, risks are events that seem to come out of nowhere. The oil price plunge, followed by a general collapse in commodities prices, in a matter of months turned Canada from one of the world’s hottest economies into one on the verge of recession.
In the case of the U.S. economy, there are similar events that could change what has been a relatively positive outlook.
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