The Bank of Canada and the US Federal Reserve are laser-focused on one thing, keeping inflation between 2% - 3%. When inflation runs too high, they have two tools to use to try and lower inflation: increase interest rates or decrease the amount of money in the system. When inflation is too low and the economy is sluggish, they do the opposite (lower interest rates and increase the money supply).

 

Here is the problem: Normally when the economy is good, like it is now, the federal governments run balanced budgets and there is no need for excess spending. When the economy is doing poorly, like during the pandemic, the governments step in and increase spending [runs a deficit] to stimulate the economy and the Bank of Canada/ US Federal Reserve lower interest rates. In summary, the Bank of Canada/US Federal Reserve and the governments usually work together to balance the economy and inflation. However, that is not the case today. Currently we have the federal governments spending significantly above their revenues while the Bank of Canada/US Federal Reserve is tightening money supply and increasing interest rates to slow down the economy.

 

In the end, the work that the Bank of Canada/Federal Reserve is doing gets negated by excess government spending. And as a result, the most widely forecast recession in history keeps getting pushed further into the future.

 

This tug-of-war has moved mortgage rates to 20-year highs!

 

The chart below speaks for itself. 30-year US mortgage rates are at 7.16%, the highest level in more than 20 years. This high mortgage rate has two implications:

 

1. Existing homeowners stay put because they can't afford to purchase a new house with the higher rates.
2. This causes inventory to shrink, which creates housing shortages and unaffordability for immigrants and young people.

 

The housing market is in a precarious position. Usually when the Bank of Canada/US Federal Reserve raise rates as quickly as they have, something breaks. We have already seen six banks in the US go bankrupt, maybe housing is the next shoe to drop!

 

I've also included a piece from our CIBC Economics team entitled "GDPnow…wow!?”

 

As always, if you have any questions, please feel free to give us a call at any time.

 

Have a great weekend.

 

Milan