Blog > Feds postpone rate hike. Will rates take a hike soon?

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Feds postpone rate hike. Will rates take a hike soon?

This blog post is sourced by the expert and economist Dr. Sherry Cooper. Enjoy her brilliance below: 

No one expected the Federal Reserve to raise rates today even though they have been criticized by some for lacking credibility. When the target overnight fed funds rate was first hiked late last year, the Federal Open Market Committee (FOMC) forecast four rate hikes this year. Now, most Committee members believe there will be only two such hikes and a growing number expect only one. Why has the Fed become increasingly dovish?

The answer lies in the disappointing first quarter economic data–with growth of only 0.8 percent in Q1–the weakness in the May employment report and mounting global uncertainty, especially the imminent possibility of Brexit. Recent polls in the U.K. suggest that the prospect of leaving the EU has risen. Although I believe these polls exaggerate the ‘leave’ vote, government bond prices around the world are surging, taking interest rates into negative territory in Germany for the first time ever as capital moves into safe havens. The vote is only 8 days away, on June 23rd, and clearly the Fed has no interest in boosting rates in the face of so much uncertainty.

The decision to remain on the sidelines was unanimous for the first time since January. The FOMC does expect the U.S. economy to rebound in the current quarter and for employment gains to rise once again with inflation remaining low.

The Fed considers the long-term ‘normalized’ fed funds rate to be 3-to-3.5 percent. Currently it stands at a mere 0.25-to-0.5 percent, implying that rates are unlikely to reach normal levels until 2018.

In the meantime, monetary policy in the U.S. and Canada remains extremely accommodative. The Bank of Canada will not raise rates this year, even with its expressed concern about high levels of household debt relative to income.

In the Bank of Canada’s recent Financial System Review, the central bank warned about “increased riskiness” in the mortgage industry as buyers, particularly in Toronto and Vancouver, stretch themselves financially to get a foothold in the housing market.
The share of new mortgages issued in 2015 that topped 450 percent of a borrower’s income hit 15 percent last year, up from 12 percent a year earlier. There have been repeated warnings that price inflation in Vancouver and Toronto is excessive, fueled in part by foreign investment, requiring first-time buyers to take on imprudent debt burdens.

The central bank, provincial governments, chartered bank CEOs, Finance Minister Bill Morneau, the IMF, the OECD and countless pundits warn that these overly indebted households are dangerously vulnerable to and economic downturn or rising interest rates. Many are calling for action to stem the tide of foreign buying, but the Bank of Canada is leaving it to the fiscal authorities to determine the appropriate next steps, if any. Governor Poloz is clear that monetary policy is not the appropriate tool.

Housing activity is flat to down in all regions except the Greater Toronto and Greater Vancouver areas and their surroundings. Mortgage arrears have not gone up and housing remains one of the key pillars of the Canadian economy, at least for now.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

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Graham Reimer
Mortgage Crusher