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Fed should proceed ‘cautiously’ given global risks, Yellen says

Jonathan Spicer and Jennifer Ablan
12:24 EST Tuesday, Mar 29, 2016

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NEW YORK — Federal Reserve Chair Janet Yellen said on Tuesday the U.S. central bank should proceed “cautiously” as it looks to raise interest rates again, because inflation has not yet proven durable against the backdrop of looming global risks to the U.S economy.
In her first comments since the Fed decided to hold rates steady two weeks ago, Yellen again sounded cautious tones about threats to the recovery of the world’s biggest economy, appearing to push back on more hawkish recent comments from a handful of her colleagues.
“Developments abroad imply that meeting our objectives for employment and inflation will likely require a somewhat lower path for the federal funds rate than was anticipated in December,” when the Fed raised rates for the first time in a decade, Yellen said at the Economic Club of New York.
“Given the risks to the outlook, I consider it appropriate for the Committee to proceed cautiously in adjusting policy,” Yellen said, referring to the policy-setting Federal Open Market Committee.
At its March policy meeting, the Fed had nodded to an overseas slowdown and early-year market turmoil in justifying a pause to planned policy tightening. Fed policymakers at the time also downgraded economic expectations and predicted only about two more rate hikes this year.
On Tuesday Yellen said she still expected that headwinds from weak growth abroad, low oil prices and uncertainty over China would abate and allow the recovery to continue.
“This expectation of fading headwinds,” she said, is a key reason policymakers expect that “gradual increases” in rates will be appropriate. “The overall fallout for the U.S. economy from global market developments since the start of the year will most likely be limited,” Yellen said.
U.S. stocks and Treasury securities prices turned positive while the dollar dropped to a one-week low after Yellen’s comments. The yield on the 10-year Treasury note traded at 1.82 per cent.
U.S. inflation measures have shown some strength, with the Fed’s preferred annual measure flat at 1.7 per cent in Februarythough still below its target of 2 per cent. Another closely watched 12-month measure was up 2.3 per cent from a year ago.
Yellen however remains cautious. “It is too early to tell if this recent faster pace will prove durable,” she said, echoing her concerns from March 16.
The decent economic data at home, the rebound in oil prices, and relative tranquility in global markets have prompted some other Fed officials to suggest another rate hike could come in April or June. San Francisco Fed President John Williams, a close ally of Yellen, said earlier on Tuesday the central bank should stay on track with its tightening plan.

Bank of Canada holds rates steady; says market volatility abating

10:07 EST Wednesday, Mar 09, 2016

The economic pieces are starting to fall into place for Stephen Poloz, giving the Bank of Canada governor latitude to keep the bank’s key interest rate unchanged.
Many of the dark clouds that have hung over Mr. Poloz’s decision-making in recent months have begun to clear. Exports are rebounding, fear of a global recession is fading and the battered price of oil is on the upswing again. The federal government is also poised to inject a hefty dose of fiscal stimulus to help revive the sluggish economy in its March 22 budget.
As a result, the central bank opted to keep its key overnight interest rate unchanged at 0.5 per cent Wednesday – where it’s been since last July when it cut rates for the second time in 2015.
“The global economy is progressing largely as the bank anticipated in its January Monetary Policy report,” the bank said in a statement accompanying the rate announcement.
Mr. Poloz and other bank officials have generally welcomed the prospect of more fiscal stimulus from Ottawa, which is expected to announce a multi-year boost to infrastructure spending.
Among other things, the bank said recent inflation pressures will “likely unwind” in the months ahead, core inflation is “at or just below” its 2-per-cent target, non-energy exports are gathering momentum, prices of oil and other commodities have rebounded and GDP growth was better than feared in the fourth quarter (at 0.8 per cent). Consumer spending also continues to “underpin domestic demand.”
All that has helped calm investor angst.
“Financial market volatility, reflecting heightened concerns about economic momentum, appears to be abating,” the bank said. “Although downside risks remain, the bank still expects global growth to strengthen this year and next [and] the U.S. expansion remains broadly on track.”
Both the price of oil (at roughly $37 U.S. per barrel) and the Canadian dollar (just below 75 cents U.S.) are close to levels the bank forecast in January, the statement pointed out.
Still, the bank remains concerned about a number of things, including still “very weak” business investment due to massive retrenchment in the oil sands as well as rising “financial vulnerabilities.”
“Financial vulnerabilities continue to edge higher, in part due to regional shifts in activity associated with the structural adjustment underway,” the bank said.
Parts of Western Canada are in recession, triggering tumbling real estate prices, rising bankruptcies and an outflow of workers drawn to Alberta’s once-booming economy. The housing market remains red-hot in Vancouver and Toronto, creating fears about affordability and an eventual price collapse.
In January, the bank forecast growth of 1.5 per cent this year in Canada and 2.5 per cent next year. The bank’s next forecast is due out April 13, which will include an assessment of the impact of Ottawa’s stimulus plan.
“The Bank of Canada tried to say as little as possible today as it waits to see what stimulus the federal budget delivers,” CIBC World Markets said in a research note.

Five things you need to know about your RRSP as this year’s deadline approaches

OTTAWA — Recent volatility on the markets has bruised RRSP investments. As the Feb. 29 deadline for contributions looms, here are five things to know about RRSPs:

To continue reading this article, please click on the link below:

Check your retirement readiness with The Globe’s new calculator

We have got to stop arguing about whether we have a retirement-savings crisis in this country.

It’s a boring, sterile debate that will never conclude with a definitive victory for either side. Most people are somewhere between the extremes of well prepared and unprepared. They need to see where they stand so they know whether to save harder.

To continue reading this article please click on the link below:

Canada could adopt negative interest rates within the next two years, Citi says

Canada could be among a handful of countries to adopt negative interest rates in the next two years as the European policy experiment gains popularity, says a new report from Citigroup.

The Bank of Japan earlier this year became the fifth central bank to go negative, which means it charges financial institutions to deposit money with it. The idea behind negative rates is that they make it expensive to hold cash, forcing businesses, consumers and banks to start spending.

Citi economists, led by Ebrahim Rahbari, say in the report that Israel is likely to be the next bank to join the negative rate club this year, but Canada, along with a few others, could also introduce such a policy in the next two years.

“In the Czech Republic, Norway and perhaps Canada, a negative policy rate is not part of our central scenario, but the risk of a negative policy rate is material,” write Rahbari and his team in their report.

In the months after the financial crisis, many central banks in the developed world introduced zero interest rate policies, or ZIRP, in an effort to get consumers spending and investing by making borrowing cheap. Not doing so risked accelerating the crisis, as consumers would hoard cash, deflation would set in and aggregate demand would collapse, worsening a recession into a depression.


While zero rates helped return growth to the developed world, some economies have not had stellar results. Deflationary pressures still dog many European economies and growth remains anemic. Disappointing growth led the European Central Bank to adopt negative rates in 2014.

In a way, a negative interest rate is an act of desperation. It punishes savers and rewards risk taking by making borrowing cheap — theoretically, banks could charge money on savings deposits and even return money on loans.

In Europe, interest rates are already going further into negative territory. Sweden’s Riksbank announced Thursday that it is lowering its repo rate from -0.35 per cent to -0.5 per cent. Negative rates have made borrowing for consumers essentially cost-free, while driving down the value of the Swedish krona immensely.

Unfortunately, while the central bank cut rates further, its policymakers have also pressured the Swedish government to introduce new regulations to cool Sweden’s ultra-hot housing market, which Riksbank officials bluntly label a bubble.

Because negative interest rates are uncharted monetary territory, there is still little data about how effective they will be long-term. What Citi does note is that as more central banks deploy them, global monetary becomes a “zero-sum” game.

“The more conventional and common negative policy rates become and, given how pervasive low inflation and weak demand are across countries, the more likely it is that a negative rate in one country will be followed by cuts elsewhere,” write Rahbari and his team in their report.

For Canada, Citi notes that there are still policy options in place before the central bank has to resort to negative rates. The federal government is set to unveil billions in new stimulus spending to prop up the economy. As well, the bank could reintroduce forward guidance, first utilized by former governor Mark Carney in 2009.

Citi notes that until very recently, it was inconceivable that central banks such as the Bank of Canada would even consider negative interest rates. But a continual undershoot of inflation targets, stubbornly weak growth in gross domestic products and a lack of alternate policy options leaves central banks around the world with few alternatives.

“Should these not suffice, the BoC is likely to consider some combination of asset purchases and negative policy rates in due course,” write Rahbari and his team in their note.

– Financial Post
Written by: John Shmuel
Date: February 11, 2016