Musings over the US Fed hold on short-term interest rates

The Federal Reserve announced this past week bold steps to stimulate the still-weak US economy and reduce high unemployment, saying it will spend $40bn a month to buy mortgage-backed securities for as long as necessary.  The US central bank also extended a plan to keep short-term interest rates at record lows (0-.25%) through to mid-2015.

This creates some interesting challenges for Governor Mark Carney and our Central Bank.  Does this force Canada to continue to maintain its historically low interest rates for an additional 3 years?  Would this be good or bad for the Canadian economy?

Some key points to consider…

  • At the time of writing the CDN Dollar is valued at $1.03 US.  A strong Canadian dollar in no way helps Canadian manufacturers be more price competitive on world markets (especially in the US, our largest trading partner).  How will a strengthening CDN dollar further impact the already battered Ontario manufacturing sector?
  • In spite of the recent strengthening in the price of oil a strong CDN dollar inevitably puts fewer dollars back into the coffers of the Alberta Treasury in the form of royalty payments.  With oil being sold in USD globally royalty payments are then converted back into CDN dollars when repatriated.  How will this negatively impact the Alberta budget and the continuing need for infrastructure spending in our province?
  • How will a continuation of low interest rates in Canada add to inflationary pressures currently being experienced in the higher growth regions in Canada?

Here’s the conundrum that many people don’t catch….

…Decoupling interest rate policy from the US and raising rates here in Canada would make the CDN dollar that much more attractive on world money markets, driving up the value of the CDN dollar and thereby making CDN manufacturing exports even less attractive, resulting in a reduction of orders for our goods and in turn, reducing employment.

…Mirroring the continuation of the historically low interest rate policy of our economically challenged neighbors to the south (and our largest trading partner) in an effort to assist Canadian exporters, manufacturers, and protect jobs, we exacerbate inflationary pressures already present in our domestic economy with the continued availability of cheap money.  Inflation erodes away the purchasing power of savers and the cost of living goes up for everybody.

What is a Canadian Central Banker to do?

All I can suggest at this point is that Mike Rowe and the producers of Dirty Jobs on the Discovery Channel consider airing an episode featuring Canadian Central Bank Governor Mark Carney.  For any readers not familiar with the show; every week Mike Rowe introduces viewers to hardworking men and women who overcome fear, danger and sometimes stench and overall ickiness to accomplish their daily tasks.  Sums up the life of a Mr. Carney to a tee in this current economic environment wouldn’t you say?

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