MacroScope

The Bank of Canada is probably not ready to seriously consider cutting rates — yet

With all signs showing the Canadian economic miracle is fading, the Bank of Canada is understandably starting to sound more dovish. The Canadian dollar has got a whiff of that, down about 10 percent from where it was this time last year.

But that doesn’t mean Governor Stephen Poloz is ready to signal on Wednesday that his rate shears are about to get hauled out of the shed.

Yes, economic growth is expected to be restrained over the next couple of quarters, the long-awaited pick up in exports and business investment still seems elusive and inflation continues to remain undesirably weak.

Even the last monthly jobs report, which tends to be volatile, was a bit of a shock, showing nearly 46,000 job losses during the month when every forecaster was expecting net hiring.

But an overheated housing market built on a mountain of household debt – one of the highest per capita in the world – doesn’t need more stimulus from even lower rates.

The Case for a Dovish Fed

The Federal Reserve has gone on the offensive to sell its exit strategy to investors and the public, in the hopes that it can stall an increase in inflation expectations. The effort was first launched by Fed Board Governor Kevin Warsh, who argued in a Wall Street Journal editorial, followed by a speech, that when the time came for Fed tightening, policymakers might have to move quickly. Even Bernanke, whose Great Depression expertise usually pegs him as a dove, was particularly meticulous about describing the Fed’s stimulus-withdrawal tools this week, sending the bond market into a tailspin.

But with the unemployment rate rapidly climbing toward 10 percent — and expected to remain up there for the foreseeable future, some economists are telling Fed officials to hold their horses. Paul Krugman, in his blog, makes a vehement case for an ultra-dovish policy stance. He calculates that the ideal fed funds rate given current economic conditions should be, get this, -5.6 percent. In another post, he argues that even if the U.S. economic recovery is more robust than most believe, the Fed should still keep rates at rock-bottom lows for at least two years.

So where’s the case for monetary tightening? For some reason many Fed officials seem to view it as inherently unsound to stay at a zero rate for several years running — but I’m at a loss to understand what model, or even conceptual framework, leads them to that conclusion. One gets the impression of officials who have decided that they want to tighten, and are making up new conceptual frameworks on the fly to justify their desires.