Looking ahead to interest rate moves in the face of transitory inflation


A recent U.S. federal reserve meeting resulted in an indication that attention to interest rate movement will be sped up in the future.

“There’s been a few mixed messages, actually, out of the press conferences that followed that statement of the federal reserve,” says JP Gervais, chief economist at Farm Credit Canada. Gervais says it appears that inflation is transitory, and that at some point in the shorter term inflation will come back down.

Gervais says that inflation is accelerating, and the U.S. is expecting to lift interest rates in 2023 based on their eighteen-vote system for policy rates.

The timeline is certainly moving up, which is reflected in the Canadian dollar losing a bit of value after the announcement.

Before rates can be raised, however, Gervais expects that bond buying will be capped or slowed down in the U.S., similar to what the Bank of Canada is doing currently, lowering their weekly and monthly purchases of bonds. The U.S. seems to be “talking about talking about” capping those purchases, but Gervais says there’s still concern over whether or not inflation will truly be transitory or permanent in nature.

The Central Bank raised its forecast for inflation to 3.4 per cent by the end of 2021, and they also expect the U.S. economy to grow seven per cent, which could be the fastest calendar year expansion since 1984.

Canada’s financial numbers were also released this week, and Gervais says that the supply chain bottlenecks that apply to other economies globally also apply to inflation and dissipated spending that could occur in the second half of the year.

“We could see inflation being more permanent in nature, but the thing is, and I’m not saying the economists are going to get it right at this time, but we know a lot more about inflation than we used to in the past,” says Gervais. “We know that when inflation starts to be a problem is because those goods and services that don’t frequently change prices, are starting to see some revisions in pricing.”

If inflation becomes more permanent, those price changes of stable products will become more engrained in the economy. Of the basket of goods that are used to calculate the inflation measure, 58 per cent of those products have an inflation rate of over two per cent, says Gervais.

Listen in to the full conversation between Gervais and RealAg Radio host Shaun Haney:

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