Show Transcript
The U.S. Federal Reserve keeps its key interest rate on hold while raising its outlook for economic activity this year. But the Fed signaled that rock-bottom interest rates will last through at least 2023. Anthony Okolie speaks with James Orlando, Senior Economist, TD Bank, about the implications for U.S. economic growth.
Print Transcript
- As expected, the Federal Reserve left interest rates unchanged near zero and the dollar continues to be extremely dovish, with no rate hikes planned through 2023. James, what got your attention today?
- Yeah, two things really got my attention. One is the upgrade to economic growth from Federal Reserve members. They think that the recovery, which is well on its way right now, is going to continue. They don't see any hiccups along the way over the next couple of years.
And the second thing is that this is the first statement where the Federal Reserve has discussed its new operational framework, and the operational framework is such that it's not going to be prescriptive at raising interest rates just because the unemployment rate gets to a certain level. And it's also going to allow inflation to overshoot its 2% target to compensate for undershooting inflation of previous years.
And so what all that means is going to keep interest rates at this zero lower bound for longer than we otherwise would have thought. And how that feeds into financial variables is that it means that governments are able to borrow money for lower for even longer, same for corporations, and also everyday people through lower mortgage rates, which supports house prices.
- And do we know how much longer the Fed plans to overshoot their 2% target inflation?
- We still have a lot of questions about that. The Fed hasn't specifically defined what average means or what time they're going to calculate that average. We also don't know how high they're going to allow inflation to get above 2% and for how long. And so the Federal Reserve has a communication challenge where they're going to have to explain exactly how they envision the framework playing out over the next few years.
- Now we also got some data on the US consumer today, which seems to indicate that spending is slowing as some of the extra unemployment benefits ran out. What's the risk to the economic recovery if a deal can't be reached in Congress on a new stimulus package?
- Yeah, so I would argue that during the pandemic time periods, incomes, for people that lost their jobs, were supported to a significant level just based on the fact that governments provided a strong level of support. And this is very important because people that lost their jobs need to pay their bills. They need to provide food to their families, provide shelter, pay rent, pay housing costs.
And so when the government announces or isn't able to continue supporting citizens to the same level with, say, income supports, that's naturally going to cause people to spend less. And what we found is that people that have lost their jobs during this time period are much more likely to spend the money that they were able to receive from the government, whereas people that haven't lost their jobs are actually saving money during this time period. So providing that bridge for people that lost their jobs during this time is very important, so naturally, this is what you would need to see to make sure that retail sales and economic growth continues.
- So what else will you be watching over the next few months for signs that the US economy is actually back on its road to recovery?
- Yeah, I think the biggest thing that's going to impact the economic recovery is the evolution of the COVID wave. A lot of people are concerned about a second wave of COVID infections, especially as we're heading into the winter months.
We've gained a lot of ground and economic momentum. A lot of jobs that were lost earlier in the year have been gained back, and we want to continue that momentum. We want to make sure that people that want a job, that need a job are able to find one, so we need the economy to continue rebounding. But we need to balance that with public health and making sure that, as we are recovering, as we're returning to normal, that people are safe.
- And we just have a few seconds left, but I want to ask you about the US dollar. Given the low rate environment, which will likely persist possibly for the next four years, where do you see the US dollar going in the next little while?
- Yeah, so the US dollar has depreciated over the last few months, really since the recovery from the pandemic started. So when you look at trading currencies and making sure that you can understand whether which direction the greenback's headed, what we're looking for is economic growth out-performance.
So for example, because the US economy had a second wave of infections over the summer, specifically in southern US states, their economic growth rebound has been slower than in other countries such as Canada. And so as a result, the Canadian dollar has appreciated relative to the US dollar. So as we move along through this recovery phase, economic out-performance is probably going to play a bigger role in the trading of the US dollar going forwards.
- James, thank you very much for your time.
- Thank you.
[MUSIC PLAYING]
- Yeah, two things really got my attention. One is the upgrade to economic growth from Federal Reserve members. They think that the recovery, which is well on its way right now, is going to continue. They don't see any hiccups along the way over the next couple of years.
And the second thing is that this is the first statement where the Federal Reserve has discussed its new operational framework, and the operational framework is such that it's not going to be prescriptive at raising interest rates just because the unemployment rate gets to a certain level. And it's also going to allow inflation to overshoot its 2% target to compensate for undershooting inflation of previous years.
And so what all that means is going to keep interest rates at this zero lower bound for longer than we otherwise would have thought. And how that feeds into financial variables is that it means that governments are able to borrow money for lower for even longer, same for corporations, and also everyday people through lower mortgage rates, which supports house prices.
- And do we know how much longer the Fed plans to overshoot their 2% target inflation?
- We still have a lot of questions about that. The Fed hasn't specifically defined what average means or what time they're going to calculate that average. We also don't know how high they're going to allow inflation to get above 2% and for how long. And so the Federal Reserve has a communication challenge where they're going to have to explain exactly how they envision the framework playing out over the next few years.
- Now we also got some data on the US consumer today, which seems to indicate that spending is slowing as some of the extra unemployment benefits ran out. What's the risk to the economic recovery if a deal can't be reached in Congress on a new stimulus package?
- Yeah, so I would argue that during the pandemic time periods, incomes, for people that lost their jobs, were supported to a significant level just based on the fact that governments provided a strong level of support. And this is very important because people that lost their jobs need to pay their bills. They need to provide food to their families, provide shelter, pay rent, pay housing costs.
And so when the government announces or isn't able to continue supporting citizens to the same level with, say, income supports, that's naturally going to cause people to spend less. And what we found is that people that have lost their jobs during this time period are much more likely to spend the money that they were able to receive from the government, whereas people that haven't lost their jobs are actually saving money during this time period. So providing that bridge for people that lost their jobs during this time is very important, so naturally, this is what you would need to see to make sure that retail sales and economic growth continues.
- So what else will you be watching over the next few months for signs that the US economy is actually back on its road to recovery?
- Yeah, I think the biggest thing that's going to impact the economic recovery is the evolution of the COVID wave. A lot of people are concerned about a second wave of COVID infections, especially as we're heading into the winter months.
We've gained a lot of ground and economic momentum. A lot of jobs that were lost earlier in the year have been gained back, and we want to continue that momentum. We want to make sure that people that want a job, that need a job are able to find one, so we need the economy to continue rebounding. But we need to balance that with public health and making sure that, as we are recovering, as we're returning to normal, that people are safe.
- And we just have a few seconds left, but I want to ask you about the US dollar. Given the low rate environment, which will likely persist possibly for the next four years, where do you see the US dollar going in the next little while?
- Yeah, so the US dollar has depreciated over the last few months, really since the recovery from the pandemic started. So when you look at trading currencies and making sure that you can understand whether which direction the greenback's headed, what we're looking for is economic growth out-performance.
So for example, because the US economy had a second wave of infections over the summer, specifically in southern US states, their economic growth rebound has been slower than in other countries such as Canada. And so as a result, the Canadian dollar has appreciated relative to the US dollar. So as we move along through this recovery phase, economic out-performance is probably going to play a bigger role in the trading of the US dollar going forwards.
- James, thank you very much for your time.
- Thank you.
[MUSIC PLAYING]
