Echoing words from the U.S. Federal Reserve, Tal said we’re in an “unusually uncertain market.” Canadian and U.S. central bankers would be the “first to admit” they don’t know what to do.
When policy makers don’t know what to do, says Tal, they tend to be “very conservative.” That is essential because:
Trillions of dollars in economic output are riding on interest rate policy
Past recessions have frequently been caused by “monetary policy error.”
Complicating things is the fact that we’re in the midst of what could become an oil shock. Every oil shock of the last 40 years has ended in recession, stated Tal. If history is any guide, this raises the odds of economic weakness next year.
Tal summed up by saying that deleveraging consumers, tapped-out government budgets, and a double-dipping U.S. housing market all reinforce the slowdown theory. He indicated there is nothing to suggest that persistent inflation is waiting nearby in the wings.
For these reasons, Tal expects no U.S. economic recovery for at least a year. He says the most important indicator the Fed is watching is the relatively lifeless U.S labour market.
“The Fed is not even dreaming of raising rates in the next 12 months,” Tal told the audience.
As for the Bank of Canada, it has no desire to derail our U.S.-linked recovery in the absence of troublesome core inflation. It will therefore limit Canada’s rate increases, he says, at least until the Fed starts tightening.
Sidebar: For those who expect the June 30 end of quantitative easing (QE) to inflate bond yields (and mortgage rates), Tal says worry not. The market is already pricing it in.
He said the U.S. Fed’s latest round of QE lowered bond yields by just 5-7 basis points.
Robert McLister, CMT
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