Good Morning!

The United States Federal Reserve makes a decision tomorrow and if you only watch one, watch this one. 

There is a 97 per cent chance of a 25 basis-point hike by the Fed Wednesday, according to markets, but there are also growing odds that this will be the last.

A quarter-point hike would put the federal funds rate at five to 5.25 per cent, 500 basis points above where this particularly aggressive tightening cycle began 14 months ago. 

So why would central bankers stop now?

BMO chief economist Douglas Porter argues that the five-to-5.25-per-cent range would put the rate just above the latest trends in U.S. core inflation and wages.

“Our contention for much of the past year is that short-term rates would need to at least rise above underlying inflation trends to truly break underlying inflation trends. And while core inflation looks sticky, it is now mission accomplished on the degree of rate rise,” he said in his weekly Talking Points note.   

Risk management is another argument for a pause, points out Oxford Economics. Banking turmoil, which continues to bubble up after the failure of Silicon Valley Bank two months ago, has tightened credit, which acts as a brake on the economy, essentially doing the Fed’s work for it. Financial markets are also starting to get nervous about America’s looming debt ceiling.

Most expect the Fed will signal that it believes monetary policy may be close to restrictive enough, but that further rate hikes cannot be ruled out, much as the Bank of Canada did when it paused earlier this year.  

Market traders, who have been through a frantic 14 months, will rejoice at that news, but Desjardins’ Royce Mendes warns they might not want to break out the champagne just yet. 

“Life after rate hikes isn’t always what it’s cracked up to be,” the head of macro strategy said in a recent note. 

After rates peaked in the past three cycles, stock markets plummeted, the economy staggered and the Fed had to cut rates within nine months on average, he said. 

“Simply put, the end of rate hikes often coincides with the beginning of more severe pain.” 

The reason for that is because central bankers use rate hikes to slow growth and tame inflation, and they only stop when they think the economy has taken enough punishment. They are more likely to err on the side of too much, rather than too little, and that seems to be the case this time around, Mendes said.  

Some argue more hikes are needed because the U.S. economy has proved more resilient than expected. 

But Mendes said history has shown that rate hikes always take their toll and what looks like strength in the economy and financial system can quickly turn sour. 

For example, the Fed hiked rates to 6.5 per cent in 2000. Forecasts at the time called for the U.S. economy to continue to grow in the following year, but almost immediately after the last hike, the S&P 500 reversed course, Mendes said. Over the next few years, the market tanked by almost 50 per cent and the jobless rate went up 2.5 percentage points. 

“The end of this rate-hiking cycle will imply that central bankers deem the outlook sufficiently gloomy,” Mendes said. “So whenever the Fed signals the end of this latest tightening campaign, traders might want to keep the champagne on ice because it might just be the beginning of a much more challenging environment.” 

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Farms make an important contribution to Canada’s economy every year, with the real value of national crop production amounting to $24 billion, say National Bank economists who bring us today’s chart.

This year that contribution could be even bigger.

Canadian farmers expect to plant 27 million acres of wheat, up 6.2 per cent from last year and about 15 per cent higher than in 2021, Statistics Canada says. This is likely the biggest percentage increase of any field crop and if planting plans are realized, the total wheat area would be the highest since 2001, said National’s Warren Lovely and Ethan Currie.

And no where in Canada will that be a bigger deal than in Saskatchewan. This prairie province accounts for 53 per cent of the entire area farmers expect to plant with wheat this year. Alberta at 29 per cent comes next, followed by Manitoba at 12 per cent.

“Crop production looks to be one aspect of the Canadian economy proving somewhat impervious to a global monetary policy tightening barrage, a prospective bumper crop particularly good news for Canada’s prairie provinces,” said Lovely and Currie.

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Certain mistakes such as chasing past performance, fear of missing out (FOMO) and a lack of interest regularly crop up as reasons why our investments aren’t working as well as they should. Veteran investor Tom Bradley has another one: investors believe their advisers know more than they do. That’s important because it can create unrealistic expectations when realistic expectations are a must. Find out more

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Today’s Posthaste was written by Pamela Heaven, @pamheaven, with additional reporting from The Canadian Press, Thomson Reuters and Bloomberg.

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