By Michael O’Neill
The description of US Monetary Policy used to be “it’s so easy.” Not any longer. The era of accommodative monetary policy (meaning interest rates are low) in the United States ended on September 26, 2018, when the Federal Open Market Committee (FOMC) dropped the phrase “The stance of monetary policy remains accommodative” from the policy statement. Except that’s not entirely true.
Fed Chair Jerome Powell said during his press conference that Monetary Policy is still accommodative, saying the proof was in the “dot-plot” forecasts in the Summary of Economic Projections (SEP). He pointed out that the “federal funds rate, even after today’s move, is below the longer run neutral estimate of every single participant who submits an estimate.” He emphasized that the phrase was removed “not to signal a policy change, but because it was no longer needed.” The language had “run its useful life.” The Fed “did not want to suggest that they had a precise understanding of where accommodative stops or even to suggest that it was an important part of their thinking.”
This FOMC meeting was highly anticipated. Analysts economists and traders were expecting improved clarity on the pace and outlook for interest rates. They didn’t learn much more today than what they knew yesterday. The CME Fedwatch tool suggests there is a 74.2% chance of another rate hike at the December 19 meeting. Those odds are slightly less than the 74.5% seen the day before the meeting.
The Fed upgraded 2018 and 2019 GDP growth forecasts, but that was expected as well. The result is the September 26 FOMC was not as hawkish or dovish as expected. Unlike monetary policy which is still accommodative, this statement and press conference is neutral.
Canada isn’t singing “it’s so easy” either; however, it’s because of the Nafta negotiations, not monetary policy. The US deadline of September 30 is fast approaching, and the talks are at an impasse. On September 25, US Trade Representative Robert Lighthizer complained: “Canada is not making concessions in areas where we think they’re essential.” He warned “We’re going to go ahead with Mexico. If Canada comes along now, that would be the best. If Canada comes along later, then that’s what will happen. We’re sort of running out of time.”
The deadline is ostensibly to accommodate Mexico’s desire to have a US trade agreement in place before their new President, Andres Manual Lopez Obrador, takes office on December 1. Furthermore, the US Congress needs 60 days to review the text of the document before President Trump can sign it.
Canada does not have any of those constraints. Prime Minister Trudeau as repeatedly said that “a bad Nafta deal is worse than a no-Nafta deal. He has a point. The Canadian negotiating team is haggling under the threat of 25% tariffs on domestic cars imported into America. President Trump has already imposed levies on steel, aluminum, and softwood lumber, which is a textbook example of “bully-bargaining.” The deadline is being used as a weapon to extract concessions.
Earlier this week, Trudeau implied Trump said “trust me” when he told reporters “One of the things in my many conversations with President Trump on the issue of 232 tariffs … was his insistence that while if we renegotiate NAFTA, if we get to a NAFTA deal, there will be no need to worry about these other things.”
Mr Trudeau is right to feel skeptical about Trump’s promises. Long before Interac, PayPal, and credit cards, retailers used to post signs reading “In God We Trust, All Others Pay Cash.” Canada’s trade team sign should read “in God We Trust, It’s Trump We Don’t.”
Canada should insist on being exempted from all existing and future tariffs, quotas, or any other restrictions for the term of the agreement, give a third-party dispute resolution mechanism for a term of at least 15 years, and get it all in writing. Trudeau would be foolish to take Trump at his word that a Nafta deal makes the other tariffs go away especially considering that the Washington Post claims that as of August 1, 2018, Mr Trump made 4,229 false or misleading claims since taking office.
Canadian dollar traders appear to be re-evaluating their Canada/US trade expectations. They started selling Canadian dollars late last week and accelerated their sales before and after the FOMC meeting. JPMorgan analysts predicted a 10% drop in the value of the currency (to 70.00 cents) on a “worst case” Nafta breakup which would include auto tariffs, supply chain disruptions and a Bank of Canada rate cut.
Maybe they are right, but for that scenario to occur, Canada and the US would have to halt trade negotiations, and that would not go unnoticed in America. Canada is the largest export destination for thirty-seven US states and number two for another five, suggesting a worst-case scenario would be pretty awful for America as well. “It ain’t so easy” applies to US monetary policy and trade talks.