Taking Away the Punchbowl

Central banks in Canada and around the world have begun an aggressive cycle of monetary tightening: lifting interest rates quickly to undermine domestic employment and spending, in hopes of brining inflation back down toward their preferred targets (2% in Canada).

Already, this shift in policy is having major impacts on forward-looking asset markets: stock markets, debt trading (especially for emerging economies), cryptocurrencies, and housing prices are all falling sharply. Many forecasters expect a worldwide recession to result from these measures. History suggests they are likely right: never before in Canada, and rarely anywhere else, have central banks succeeded in disinflating their economies to the extent now planned without experiencing a recession.

This could thus bring a premature end to a moment of relative strength in Canada’s labour market. With the unemployment rate at a 50-year low, and employers offering better wages and conditions in an effort to recruit and retain staff, workers finally have some choices and some bargaining power about where and how they work. The modest uptick in wage growth so far (average hourly wages grew 3.9% in Canada in the 12 months to May, still slower than they were growing in late 2019 before the pandemic) is clearly not the source of current inflation (which rose sooner, and much higher, than wages). Nevertheless, even if workers didn’t cause this inflation, they will be the main victims of central banks’ determination to wring it from the economy.

Centre for Future Work Director Jim Stanford recently discussed the outlook for the labour market, and the risk that a moment of rare exuberance could be stifled all-too-quickly by orthodox monetary policy, in this feature interview with Amanda Lang on BNN Bloomberg’s business show Taking Stock: