Hidden Wage Strength Backs Two 2016 Fed Hikes, TD Economist Saysby
Two hikes `completely reasonable' as constraints build
BOC likely on hold until 2018 as fiscal boost takes time
Hidden job market strength justifies the U.S. Federal Reserve raising interest rates twice this year to curb inflation pressures, according to Beata Caranci, chief economist at Toronto-Dominion Bank, which has more branches in the U.S. than its own country.
Wages in states like New York and Massachusetts are rising at about a 3 percent pace as employers seek out higher-skilled workers, Caranci, 44, said in an interview at Bloomberg’s Toronto office Friday. That’s in contrast to the last jobs report where wages fell on a monthly basis for the first time since December 2014 and the 12-month pace of 2.2 percent lagged a Bloomberg survey calling for 2.5 percent.
“On more of a regional basis you can see more of what’s happening,” said Caranci, who was head of TD’s U.S. and international economics group until her promotion last year. “Your oil-producing states are depressing the wage movement as well as some of the manufacturing base, but where you have high-skill workers you are elevating it. It speaks to some of the capacity pressures that are getting eaten up more and more in the U.S.”
Caranci’s Fed forecast is in line with the average estimate of 70 analysts surveyed by Bloomberg who see the federal funds target rate at 1 percent by the fourth quarter. The Federal Open Market Committee will publish its next policy statement at 2 p.m. Wednesday from Washington, together with updated quarterly economist forecasts and projections of the expected path of policy. Chair Janet Yellen will hold a press conference at 2:30 p.m.
Investors have been too pessimistic about the potential drags on U.S. growth from a stronger dollar and signs of global weakness, Caranci said. U.S. core inflation has held up even as the currency’s strength could have dented price gains, she said. The core index advance of 2.2 percent in January from a year earlier was the strongest since June 2012.
“Two hikes, 50 basis points, is completely reasonable because we think that you have significantly less slack in the U.S. economy than people are expecting,” Caranci said.
Canada’s central bank is unlikely to raise rates until 2018 as exports and investment will be slow to rebuild following a plunge commodity prices such as oil and fiscal stimulus takes a while to kick in, Caranci said.
Bank of Canada Governor Stephen Poloz kept his target lending rate at 0.5 percent last week, where it’s been since reductions in January and July of last year. The central bank said the recovery is on track and a lot of slack remains in the economy.
“It will look like the Fed’s cycle, it’s very gradual and minimal,” she said. “If there is opportunity to hike, it would be out to early 2018.”
The economy won’t get much help this year from stimulus in a budget Prime Minister Justin Trudeau will deliver March 22, she said. The government has signaled a deficit may reach C$30 billion ($23 billion), money that won’t get into the economy fast enough to lift growth this year, she said. The boost to gross domestic product for next year will be about 0.3 percentage point unless there are surprise stimulus measures, she said.
“It’s really not going to be a huge game changer for Canada, but it certainly would lend a helping hand,” she said.
One area set to cool is Canada’s housing market, Caranci said. Toronto-Dominion has the most pessimistic call for housing starts in a monthly Bloomberg News economist survey published Friday, saying the pace will fall to 161,000 in 2017 from 181,000 this year.
Obstacles include record consumer debt burdens, tougher mortgage regulations, and already high prices in markets like Vancouver, Caranci said. “You just feel this market is pretty topped out,” she said. “There’s no doubt it has that froth feel to it.”