Today was interest rate announcement day on both sides of the Canada–US border. The two central banks made different decisions, but the underlying message was remarkably similar. Consumer prices remain a problem, economic growth has been stronger than expected, and investors should not expect a return to cheap money anytime soon.
The Bank of Canada increased its benchmark overnight lending rate by 25 basis points to 2.5%. Meanwhile, the Federal Reserve decided to leave its benchmark rate unchanged, maintaining a target range of 3.75% to 4%.
But the headline that the Fed did nothing would be misleading. Sometimes monetary policy becomes more restrictive without the central bank actually changing interest rates.
That's because the bond market can do some of the Fed's work for it.
Fed Chairman Kevin Warsh emphasized that inflation has been running above the central bank's two percent target for nearly six years.
Six years is a long time to miss a target that forms the foundation of monetary policy credibility.
The Fed cannot simply declare that three percent inflation is the new normal without undermining confidence in its commitment to price stability.
There was also the unavoidable political dimension to today's announcement.
The United States is holding its midterm elections on November third, just six days after today's Federal Reserve meeting.
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