U.S. will soon feel effects of Fed's over-tightening: Rosenberg
U.S. Federal Reserve Chair Jerome Powell is starting to backtrack on the central bank’s “over-tightening” at the end of 2018, according to David Rosenberg.
“I think that not just the December rate hike, but the September rate hike of last year were the overkills,” Gluskin Sheff + Associates Chief Economist and Strategist David Rosenberg told BNN Bloomberg Thursday.
The Federal Reserve left its benchmark lending rate unchanged between 2.25 and 2.50 per cent on Wednesday, after increasing it by 0.5 percentage points in the back half of 2018.
Rosenberg said those hikes will be historically significant if the U.S. slides into a recession.
“I’ve been saying for a while, that when historians look back on this cycle – like they looked back at all the 10 recessions we’ve had in the post-World War II-period – which had the Fed’s thumbprints all over them, the answer is, ‘Yes, the Fed overtightened,’” he said.
“Everything that happens this year is going to basically represent the convalescence of all the Fed tightenings, including the balance sheet.”
Rosenberg said that the Fed will correct its course, but that any effects from that can’t be expected to take hold until next year.
“The Fed is going to ease policy before you know it,” he said. “That’ll have its impact in 2020, but this year will be dominated by the lags … just as 2008 were the lags from ’06 and ’07 and 2001 were the lags from 1999 and 2000.”
“The lags are going to hit home and I think the Fed is realizing that right now.”
As for Canada, Rosenberg said that the Bank of Canada will have no choice but to follow the Fed’s lead, meaning the loonie – which gained a penny on the U.S. dollar over the last week – could weaken.
“The Bank of Canada is going to have to follow the Fed on this more dovish course, and I think that the Canadian dollar – this uptick we’ve seen in the past 24 to 48 hours – is going to be very temporary,” he said.