BOC Rate Decision Illustrates Central Banks' Dilemma; Boston Fed's Collins Considers More Tightening, RBA Gov. Philip Lowe's Final Speech

BOC Rate Decision Illustrates Central Banks' Dilemma; Boston Fed's Collins Mulls More Tightening, RBA Gov. Lowe's Final Speech By James Christie

Good day. The Bank of Canada kept interest rates unchanged on yesterday, as economists expected, while cautioning it remains worried about underlying price pressures and might raise rates again. The bank's decision reflects the predicament of central bank officials worldwide: Rate increases last year and this have started to cool economic activity, but flickers of inflation still remain. Case in point, Federal Reserve Bank of Boston President Susan Collins in a speech yesterday noted her expectation that economic growth would slow as this year comes to close and that the Fed may be approaching a peak for its policy rate. But she also said more monetary tightening can't be ruled out. Meanwhile, Reserve Bank of Australia Gov. Philip Lowe will conclude his seven-year stint at the helm on Sept. 17. In his final speech earlier today, Lowe took aim at a number of his critics, including the media, saying central banks don't have a crystal ball, and that shocks to the economy, which included the Covid-19 pandemic, should always be part of policy decision-making.

Now on to today's news and analysis.

Top News Bank of Canada Holds Rates Steady as Economy Shifts Down

The Bank of Canada held its main interest rate steady at 5% after back-to-back rate rises in June and July, saying the economy has shifted into a weaker phase and labor-market pressures have eased.

Nevertheless, the central bank Wednesday said it remained concerned "about the persistence of underlying inflationary pressures," and is prepared to raise rates again should conditions not improve. Along with the U.S. Federal Reserve, the Bank of Canada has been among the most aggressive developed-world central banks in lifting rates higher to cool inflation, having done so 10 times since March of last year for a total of 4.75 percentage points.

Boston Fed's Collins Expects Slowing U.S. Growth by End of Year

The U.S. economy will start to soften as the year draws to a close and then weak growth will persist into 2024, Federal Reserve Bank of Boston President Susan Collins said on Wednesday. "I do expect to see slowing growth by the end of this year and throughout 2024," Collins said in a speech to the New England Council, adding that, "Demand should slow as spending becomes more interest-sensitive." Collins said she believes the Fed can bring inflation toward price stability with "an orderly slowdown" and only a modest unemployment rate increase, rather than a recession, and that the central bank can be patient with interest rate policy. She said the Fed may be near, or at, the peak for its policy rate, but further monetary tightening could be warranted, depending on the data. (MarketWatch)

Inflation, Interest-Rate Worries Drag Stocks Downward Outgoing RBA Gov. Lowe Calls for Better Policy Coordination

The outgoing governor of the Reserve Bank of Australia, Philip Lowe, used his last public speech to defend his record, and to call for greater coordination between monetary and fiscal policy to smooth economic cycles.

U.S. Economy Modest Growth as Consumers Come Under Pressure-Beige Book

U.S. economic activity grew modestly in July and August, according to a Federal Reserve report released Wednesday. Consumer spending was stronger than expected during the summer, driven by a surge in spending on tourism and travel, according to the central bank's regular survey of the economy known as the Beige Book. But business contacts in some Fed districts said customers are relying more on credit to support spending as excess savings have dwindled. A separate report from the New York Fed released last month found credit-card balances exceeded $1 trillion for the first time in the second quarter of 2023. (Dow Jones Newswires)

Real-Estate Doom Loop Threatens America's Banks

Regional banks gorged on commercial real-estate loans and related investments in big cities over the past decade, and now those loans and investments are a looming threat for the banking industry-and potentially the broader economy.

Rising Rents Are Hitting American Suburbs Hardest

America's suburbs are posting the country's fastest-rising rents , a sign that the migration of families from major cities is looking more long-term while high mortgage rates and home prices keep some remote workers renting for longer.

Mortgage applications fell 2.9% in the latest week to their lowest level since December 1996, the Mortgage Bankers Association said. The average rate for a 30-year mortgage is 7.21%. High rates and home prices have paved the way for housing affordability to drop to the lowest level since 1984, according to a separate report from Black Knight. (MarketWatch) Key Developments Around the World Blinken Pledges More Than $1 Billion in Aid to Ukraine

Secretary of State Antony Blinken signaled Washington's long-term support for Ukraine , traveling to Kyiv in an effort to reassure leaders as they pursue a slow-going counteroffensive against entrenched Russian forces.

Russian Strike on Ukrainian City Kills 16 Everyone Is Bearish on China-Except Bond Investors

China's economy is in a funk, but spreads on dollar bonds issued by many Chinese companies have remained relatively stable, suggesting investors don't think times will get so bad that these companies can't pay back their debt.

Saudi Cuts Send World Diesel Prices Soaring

Diesel prices have climbed more than 40% in the U.S. and Europe since May, when surprise output cuts by Saudi Arabia and some other members of the OPEC+ oil cartel took effect, Argus data showed.

The Middle East Becomes the World's ATM Feeble German Economy Faces Fresh Contraction as Factories Falter

Germany's embattled economy, once Europe's main engine of growth, looks set for a fresh contraction as its all-important manufacturing sector continues to weaken amid higher energy costs and intense competition from China.

Glynn's Take: Lowe Exits RBA Bruised But Still Standing Tall By James Glynn

Reserve Bank of Australia Gov. Philip Lowe has made a massive contribution to the evolution of monetary policy in Australia, but one that now seems to have gone unappreciated by the general public.

It all began to unravel for the RBA governor in late 2021 when it became clear that the long-dormant inflation genie had been let out of the bottle by unprecedented easing from central banks worldwide struggling to deal with the fallout of the pandemic. As prices of everything from food to energy surged, the war in Ukraine came out of left field to further muddy the inflation picture, and China's strict approach to containing the virus by looking down entire cities to clogged up global supply chains. Read more .

Financial Regulation Roundup Wells Fargo Is Still in Fix-It Mode

Seven years after a fake-accounts scandal engulfed Wells Fargo, its employees are grappling with how to best catch or prevent problems , as the bank must upgrade risk functions to its liking and to satisfy regulators.

More Binance Executives Leave, Including Some Overseeing Russia

Several Binance executives have left recently, including leaders overseeing its Russian business and connections to the traditional financial system, extending a period of rapid senior turnover at the crypto giant amid intense regulatory scrutiny .

Forward Guidance Thursday (all times ET)

8:30 a.m.: U.S. productivity and costs, revised for second quarter; U.S. weekly jobless claims

11:45 a.m.: Chicago Fed's Goolsbee speaks at career pathways in economics conference in Chicago

2:10 p.m.: Bank of Canada's Macklem presents economic progress report to Calgary Chamber of Commerce

3:45 p.m.: Atlanta Fed's Bostic speaks on economic outlook in Davie, Fla.

4:55 p.m.: Fed's Bowman speaks at Philadelphia Fed fintech conference

7 p.m.: Atlanta Fed's Bostic speaks on economic mobility in Fort Lauderdale, Fla.

7:05 p.m.: Dallas Fed's Logan speaks on monetary policy and the economy in Dallas

Friday

8:30 a.m.: Canada labor force survey for August

9 a.m.: Fed's Barr speaks on payments innovation at Philadelphia Fed fintech conference

3 p.m.: U.S. consumer credit

4:15 p.m.: Assets and liabilities of commercial banks in U.S.

Research ECB Should Lift Rates Once More, Governing Council Member Says

Considering stubbornly high inflation and a tight labor market, the European Central Bank should raise its key interest rate one more time to bring inflation down to 2%, according to ECB governing council member and Slovakia central bank governor Peter Kazimir. "As they say, better to be safe than sorry," he writes in a post on the website of the National Bank of Slovakia. While the ECB could take a break in September and lift rates by 25 basis points in October or December, the "more straightforward and efficient solution" would be to raise rates next week, Kazimir writes. "Markets receive a clearer indication about the likely terminal rate, and we have more time to evaluate whether inflation is on a sustainable downward path towards our target," he writes.

-Ed Frankl

Commentary Why Higher Unemployment Is Good News Now

Very rarely should you celebrate rising unemployment. This is one of those times .

Friday's news that the unemployment rate rose to 3.8% in August, an 18-month high, is one of several recent signs that the labor market has softened significantly. This is a necessary stage in the Fed's campaign to bring inflation back down to 2%, and keep it there. It isn't enough to ensure we avoid a recession, but it helps, writes Greg Ip in Capital Account.

America's Trade Trouble Will Continue

The U.S. trade deficit has been narrowing and that has been a plus for the U.S. economy, but it is still far wider than it was before the pandemic hit and odds are it is going to stay that way for a while, Justin Lahart writes.

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09-07-23 0715ET