Key Takeaways
- Canada cut interest rates for the second time this year, as officials said they wanted to get ahead of potential economic weakness.
- Some U.S. economists have similar concerns, arguing that the Fed should move aggressively and cut rates at its meeting next week.
- Canadian officials pointed to weakness in the labor market as a reason for its cut.
Canada’s central bank isn’t waiting for its economy to get any worse before making interest rate cuts—and some say the Federal Reserve shouldn’t either.
After becoming the first Group of Seven (G7) economy to cut its interest rate in the face of a global fight against inflation, the Bank of Canada again reduced its rate by a quarter-percentage point Wednesday. The move comes as inflation in Canada decreased to 2.7% in June, down from May levels.
Central bankers in both Canada and the U.S. have been watching closely to see signs that inflation was moving lower. However, Canadian officials are now raising worries that their inflation may fall too fast as a result of weakening economic conditions.
“With the target in sight and more excess supply in the economy, the downside risks are taking on increased weight in our monetary policy deliberations. We need growth to pick up so inflation does not fall too much, even as we work to get inflation down to the 2% target,” Bank of Canada Governor Tiff Macklem said today.
Some U.S. economists echoed those messages this week. Some argue the Federal Open Market Committee (FOMC) shouldn’t wait until its September meeting to cut, and should instead take action at its meeting next week.
Canada Worries About Jobs
Canada’s rate cuts have come as the country faces economic conditions that are unwinding faster than in the U.S. Canadian economists are particularly worried about employment levels and the health of consumer spending.
“Household spending, including both consumer purchases and housing, has been weak. There are signs of slack in the labor market. The unemployment rate has risen to 6.4%, with employment continuing to grow more slowly than the labor force and job seekers taking longer to find work,” the Bank of Canada said in a statement accompanying the decision.
Economists following the U.S. have seen similar economic trends, with some believing the Federal Reserve already has enough evidence to act on interest rates. Recent employment reports show that job growth has been slowing in the U.S., with the unemployment rate ticking up.
Former New York Fed President Bill Dudley joined that group Wednesday when he warned in a Bloomberg column that the labor market in the U.S. could also rapidly decline, which he argued is an impetus for the Fed to act at its upcoming meeting at the end of July.
“Although it might already be too late to fend off a recession by cutting rates, dawdling now unnecessarily increases the risk,” he wrote.