The economic reports from the U.S. have been cheerier as of late, and as the Federal Reserve is to wind down its stimulus program by October, there’s been speculation that an interest rate hike won’t be far behind. In fact, the minutes of the Fed’s July 29 – 30 meeting show several internal members believe central rates are due for an increase.
However, Fed Chairman Janet Yellen has confirmed this won’t be the case – at least not yet. At the annual meeting of the world’s Central Bankers this week in Jackson Hole, Wyoming, she quashed any reports of a 2014 increase, and emphasized that rates won’t rise until well into 2015, stating, “there is no simple recipe for appropriate policy.”
Rates Go Beyond Employment Improvements
Criticism of the low rate environment is over concern that the country risks “falling behind” if the Fed does not raise rates soon, after maintaining them at rock bottom since the 2007 – 2009 recession. And, as many countries look to the U.S. for trends in economic recovery, Yellen’s comments are significant to the international community.
Rate hike supporters point to strong employment numbers in the U.S. as one of the best arguments for raising rates. If more people are working and creating income, they are more likely to afford and withstand a rise in the cost of borrowing. However, Yellen says the headline labour number alone cannot drive interest rate policy. She remains concerned about the quality of employment, and the state of American job security, stating that “the economic disruption of the last five years has left millions of workers sidelined, discouraged, or stuck in part time jobs — facts that are not captured in the unemployment rate alone.”
Canada’s in the Same Policy Boat
Interest rates in Canada have also been at historic lows since 2009. Our Bank of Canada Governor, Stephen Poloz, has taken the same ‘wait-and-see’ approach as Yellen. However, Canada’s recovery has been in many ways stronger than in the U.S. For example, real estate here hasn’t faltered, and our country was spared the housing collapse that devastated our American neighbours.
As well unemployment is at the lowest level since the 2009 financial meltdown. However, like Yellen, Governor Poloz says there are many factors to consider before raising rates – for instance, although unemployment rates are down considerably since peaking close to 9 per cent in 2009, many people who had full time jobs are now taking part time work, are self-employed or have decided not to return to work.
The Economic Implication of Low Rates
Rising consumer debt is the main concern resulting from persistently lower rates. If money is cheap to borrow, Canadians and Americans will continue to feel encouraged to take on more debt because they can afford to. Knowing this, and that many Canadians may not be able to afford their homes if rates rise, makes it more difficult for central bankers to make policy decisions. The positive side? When rates rise it will be gradual and steady, so those in high amounts of debt can learn to manage it.
Higher Rates Still On Schedule For 2015
Both Yellen and Poloz are targeting to start raising rates late in 2015. Anyone carrying a large amount of household debt should use this occasion to start planning for the inevitable. Even if a rate hike comes later than than anticipated, you will be in a much better situation because you have paid more of your debt down.
On the flip side, when rates rise people feel more encouraged to save as they are instantly getting a better return on their investments. Higher rates also mean consumers are more caution to take on too much debt as it costs more to service.