Postmortem: Macklem’s new dashboard

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Financial Post columnist Kevin Carmichael, editor of the FP Economy newsletter, unpacks the week in economics.

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Hotel QE-fornia

The Bank of Canada’s experiment with quantitative easing, or QE, the formerly radical approach to suppressing interest rates popularized by the Federal Reserve and the European Central Bank during the Great Recession, is nearing its end. Canada’s central bank on July 14 tapered its weekly purchases of Government of Canada debt to $2 billion, from $3 billion previously. Updated forecasts predict a resurgence in economic growth over the next 18 months, so it was safe to remove a little stimulus now in anticipation of better days ahead.

The move was a positive development. It’s possible that traders of American and European debt — and by extension, the central bankers that seek stability in those markets — got a little addicted to QE, a policy that requires central banks to use their unique power to create money to purchase financial assets. So for those who think markets work best when profit-seeking investors are setting prices, it was comforting to see the Bank of Canada turn away from the path that leads to QE Forever. “One of the things we learned with Europe and the U.S. is that these central banks get in and they buy and it’s like Hotel California, they never leave,” Tom O’Gorman, head of fixed-income at Franklin Templeton Canada, told FP Economy. “I think the Bank of Canada is doing something right there.”

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Some think the Bank of Canada could whittle its bond purchases to zero by the end of the year. Governor Tiff Macklem and his deputies on Governing Council still would wield influence over interest rates even if that were to happen. While they would no longer be creating money and adding assets to their portfolio, they likely would opt to reinvest what they receive when the bonds they’ve already purchased mature, rather than quit cold turkey.

Macklem’s dashboard

Macklem also reiterated last week that he intends to leave the benchmark interest rate locked near zero until at least the middle of next year, which is when the central bank predicts the economy will be approaching full health.

Some economists, including Alberta Central’s Charles St-Arnaud, think that growth will be so strong by next spring that Macklem will have to move sooner than he currently expects. (St-Arnaund, a former Bank of Canada economist, sees the central banking lifting the benchmark rate by a quarter point in July 2022.) 

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The economy has rallied from last year’s epic collapse faster than many anticipated, but the country still is a long way from achieving the “complete” recovery that Macklem has pledged to deliver. The Bank of Canada reckons there should be about 550,000 more jobs than currently exist, given the trajectory of population growth at the start of the pandemic. That’s a lot of ground to cover. Canadian employers added about 333,000 jobs in 2019, and that was a pretty good year. 

New dials

Total employment isn’t the only thing Macklem will be watching.

For months, the governor has been saying that the path of interest rates will be determined by an array of indicators, while remaining coy about what gauges he’s put on his dashboard. We’ve done our best to reverse engineer what Macklem’s Bloomberg screen looks like by turning clues about the data the central bank cares about into charts, and then updating them when new numbers arrive.

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We think it’s pretty good analysis, considering what FP Economy readers pay for it, but we knew we were only scratching the surface because of Macklem’s reticence to share. It was a problematic stance for a central bank that prides itself on the strides that it’s taken in recent years to be more transparent. 

Maybe the governor started to realize that, because, at the press conference that followed the interest-rate announcement, he gave his fullest answer yet to a question about the indicators he cares about most. “Don’t take this as a comprehensive list,” he said, and then went on to reveal a pretty comprehensive list: the unemployment rate; the employment rate; full-time employment; the way employment divides between full-timers, part-time workers and the self-employed, as well as the split between private-sector and public-sector jobs; the extent to which women have closed their post-pandemic employment gap with men; the labour underutilization rate; hours worked; productivity; and business investment. 

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Phew! Regular readers will be familiar with some of those gauges. For example, we noted hours worked in last week’s Postmortem, and we flagged the gap between men and women on June 14. We’ll probably create a full dashboard in time for the next round of hiring data, but for now, we thought we’d highlight a few of the indicators that we haven’t mentioned previously. Here’s what’s been going on with the employment rate, which we also wrote about on June 14:

Total employment was an obvious indicator, but it wasn’t clear until last week that Macklem was paying particular attention to how many of them were full-time positions. There were 15.2 million full-time jobs in June, 81 per cent of the total, compared with 15.6 million in February 2020, when full-time workers represented 82 per cent of total employment.

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The labour underutilization rate was a new one. Statistics Canada says it “combines those who were unemployed; those who were not in the labour force but who wanted a job and did not look for one; and those who were employed but worked less than half of their usual hours.” The underutilization rate doesn’t warrant much attention in normal times, but Statistics Canada has been highlighting it since the start of the pandemic in March 2020. The rate surged to about 36 per cent in April from about 11 per cent in February, and then drifted back down to about 15 per cent in March.

The third-wave of COVID-19 infections caused a spike in April and May, and then the rate dropped to 15.6 per cent in June. That’s still significantly higher than February, which is one of the reasons why the Bank of Canada intends to remove stimulus very slowly. 

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Inflation scare

The inflationistas were worked up again on July 13 after the U.S. Bureau of Labor Statistics reported that America’s Consumer Price Index (CPI) surged 0.9 per cent in June from May, the biggest one-month increase since 2008.

“This is a shock going through the system associated with reopening of the economy, and it has driven inflation well above 2%. And of course we’re not comfortable with that,” Jerome Powell, the chair of the Federal Reserve, told Senators in testimony later in the week. The Wall Street Journal characterized those comments as “less confident” than Powell’s earlier assertions that prices would eventually settle down.

Statistics Canada isn’t scheduled to release its June CPI report until the end of month. The U.S. numbers came out just as the Bank of Canada’s leaders were finishing up their latest round of interest-rate discussions. They definitely have an eye on inflation, but like Powell, Canada’s policy-makers are sticking with their assertion that the current burst of inflation will pass. “We think those are temporary, we think those will work their way out,” Macklem told The Canadian Press. “But if they don’t, and if we start to think that inflation will remain above our target range, we have the mandate, we have the tools and we will control inflation. We will get it back to target.“

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You could argue that those comments imply that Macklem’s resolve also is being tested by the onslaught of startling inflation figures. But even if that’s so, he still mustered the nerve to proceed with a recovery strategy that will see the Bank of Canada look the other way as the CPI exceeds the central bank’s two-per-cent target until at least the end of 2023. Macklem is more concerned about weak employment than strong inflation, at least for now. 

Financial Post

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