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Higher for longer?:

For now, policymakers are forecasting that the pop in interest rates will eventually fade. They kept their estimate of the rate setting that will keep the economy chugging along at a steady and sustainable pace in the longer run — something economists often call the “neutral rate” — unchanged in their projections, at 2.5 percent.

Asked on Wednesday why Fed officials expect rates to remain higher through 2026, Mr. Powell pointed to recent strong economic activity, which he said generally suggested “we have to do more with rates.”

But the Fed chair was not yet ready to conclude that the economy has undergone a lasting shift.

“It may of course be that the neutral rate has risen,” Mr. Powell said. “You do see people raising their estimates.”

Seven of the Fed’s 19 policymakers on Wednesday predicted that rates could hover above 2.5 percent in the longer run — the same number as in the last set of forecasts, in June. But four officials said they expected interest rates to settle above 3 percent in the long term, up from two members in June and zero a year ago.

This all arises from the famous dotplot:

Well, it took 13-odd years to come to the view that a 3% mortgage was normal. It might take a little while to decide that it ain’t.

So anyway, five-year Canadas hit 4.30% today and the equity guys decided to pay off their mortgages instead:

An unexpected 9% drop on Thursday in initial U.S. jobless claims, to the lowest level in eight months, played into the Fed’s notion that the labour market remains too tight, putting upward pressure on wages, and the economy is resilient enough to withstand higher rates for longer.

“Higher for longer” has become a common credo among the central banks of the world’s biggest economies as global policy tightening, in order to tame inflation, reaches its peak.

That includes Canada. Data on Tuesday showed that Canadian inflation climbed more than expected to 4% in August. Money markets are now pricing in about a 40% chance the Bank of Canada will hike interest rates by another quarter percentage point at its next policy meeting Oct. 25.

The Canadian 10-year bond yield on Thursday touched a 15-year high at 3.98%. Some have warned that Canada’s record of declining productivity over the past three years is likely to make it more difficult for the Bank of Canada to tame inflation, raising the prospect of additional interest rate hikes even as the economy slows. Declining productivity tends to hold back economic growth. It also stands to add to unit labor costs, a key measure of inflation pressures coming from higher wages.

All 10 of the Toronto market’s major sectors lost ground on Thursday, including a decline of 2.4% for materials, which includes precious and base metals miners and fertilizer companies, as copper and gold prices fell.

This entry was posted on Thursday, September 21st, 2023 at 6:19 pm and is filed under Market Action. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.