U.S. wage strength backs two 2016 Fed hikes, while Canada unlikely to raise rates until 2018, TD economist says

Hidden employment market strength justifies the U.S. Fed raising rates of interest twice this year to curb inflation pressures, according to Beata Caranci, chief economist at Toronto-Dominion Bank, that has more branches within the U.S. than its very own country.

Wages in states like New York and Massachusetts are rising at approximately a 3 per cent pace as employers look for higher-skilled workers, Caranci, 44, said in an interview at Bloomberg’s Toronto office Friday. That’s as opposed to the last jobs report where wages fell on a monthly basis the very first time since December 2014 and also the 12-month pace of 2.2 per cent lagged a Bloomberg survey with 2.5 percent.

“On more of a regional basis you can observe much more of what’s happening,” said Caranci, who was head of TD’s U.S. and international economics group until her promotion this past year. “Your oil-producing states are depressing the wage movement in addition to some of the manufacturing base, but where you have high-skill workers you are elevating it. It talks to some of the capacity pressures which are getting eaten up increasingly more within the U.S.”

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Too Pessimistic

Caranci’s Fed forecast is within line with the average estimate of 70 analysts surveyed by Bloomberg who begin to see the federal funds target rate at 1 percent by the fourth quarter. The government 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 concerning the potential drags on U.S. growth from the 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 coming 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 believe that you have considerably less slack in the U.S. economy than individuals are expecting,” Caranci said.

Canada’s central bank is unlikely to raise rates until 2018 as exports and investment will be slow to rebuild carrying out a plunge in commodity prices such as oil and fiscal stimulus requires a while to start working, Caranci said.

Gradual, Minimal

Bank of Canada Governor Stephen Poloz kept his target lending rate at 0.5 per cent a week ago, where it’s been since reductions in January and July of last year. The central bank said the recovery is on the right track and lots of slack remains throughout the economy.

“It will look like the Fed’s cycle, it’s very gradual and minimal,” she said. “When there is opportunity to hike, it would be to early 2018.”

The economy won’t get much help this season from stimulus inside a budget Prime Minister Justin Trudeau will deliver March 22, she said. The government has signaled a deficit may reach $30 billion, money that won’t enter into the economy fast enough to lift growth this year, she said. The boost to gross domestic product for the coming year will be about 0.3 percentage point unless you will find surprise stimulus measures, she said.

Housing Cools

“It’s not really going to be a huge game changer for Canada, however it certainly would lend a helping hand,” she said.

One area set to cool is Canada’s housing market, Caranci said. Toronto-Dominion has got the most pessimistic demand 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 season.

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 without doubt it’s that froth feel to it.”

Bloomberg News