Skip to main content

The Globe and Mail

'Crises of confidence do not have silver bullet solutions'

These are stories Report on Business is following Tuesday, Aug. 9. Get the top business stories through the day on BlackBerry or iPhone by bookmarking our mobile-friendly webpage.

Follow Michael Babad and Globe top business news on Twitter

What the Fed did, and didn't, do The Federal Reserve today took a small step toward easing the market's angst by pledging low interest rates, with a timeline, amid an increasingly dark cloud. But, as Toronto-Dominion Bank economist James Marple put it, "crises of confidence do not have silver bullet solutions."

Story continues below advertisement

The U.S. central bank painted a bleaker picture of the economy, and offered no new measures to fight it. But the Federal Open Market Committee, its policy-setting panel, did say its benchmark rate, now near zero, will likely remain there until at least mid-2013.

"The committee now expects a somewhat slower pace of recovery over coming quarters than it did at the time of the previous meeting and anticipates that the unemployment rate will decline only gradually toward levels that the committee judges to be consistent with its dual mandate," the Fed said in a statement. "Moreover, downside risks to the economic outlook have increased."

Some market players had hoped the central bank would announce new measures to juice the recovery, despite warnings from economists that the Fed was running out of bullets. In particular, some had hoped for more quantitative easing, a bond-buying program known as QE aimed at driving down longer-term rates.

That didn't happen, prompting the stock rally in New York to fizzle at first, and then come back with sharp gains in the Dow Jones industrial average , the S&P 500 and the S&P/TSX composite index .

"Feeling under pressure to do more than just stand and watch, the U.S. Federal Reserve opted to fire the smallest pistol in its arsenal, while leaving the bigger guns idle for now," said Avery Shenfeld, chief economist at CIBC World Markets.

Mr. Marple, a senior economist at TD, described the Fed's action as unprecedented, which will have a "modest" impact on near-term growth.

"The Fed's actions today may prove to be more stimulative a little down the road," he said. "The market appears to be pricing in a very significant chance of a recession. By removing some uncertainty about future Fed actions, longer-term rates should remain lower for longer."

Story continues below advertisement

Notable, too, in the decision was that three members of the panel didn't want to change the language of the statement, preferring to leave it at just describing conditions as likely to warrant exceptionally low rates for an "extended period," rather than add the 2013 reference. Hello? Do you see what's out there?

"Even after the downward revisions to GDP, the weak Q2 growth rate, the rise in unemployment, the continued housing depression, the fiscal tightening and the recent sharp selloff in the stock market, three out of 10 voting members on the FOMC wanted no change in the 'extended period' language," said Sherry Cooper, chief economist at Bank of Montreal, noting that the Fed took "the least action possible given the circumstances" and still there were dissenters.

"They should give their heads a shake. Interest rates will rally further, but stock markets sure aren't going to like this."

ECB buys bonds The European Central Bank confirmed today that it has been buying up euro zone bonds, though it didn't specify which countries. It was widely believed to be buying Italian and Spanish debt to try to stop the debt crisis from spreading further through the 17-member monetary union.

"We are in the secondary market," ECB chief Jean-Claude Trichet told a radio interviewer.

As The Globe and Mail's Rita Trichur writes today, the central bank is in a particularly tough spot, criticized in some quarters for raising rates in the midst of a crisis as its mandate remains to control inflation. Now, though, the ECB has taken firm steps to fight the debt crisis.

Story continues below advertisement

And many observers believe the efforts are only a quick-fix solution, with no lasting impact.

"The ECB stepped in to buy the sovereign debt of Italy and Spain yesterday, with some success," said Carl Weinberg, chief economist at High Frequency Economics.

"Today, the second day of intervention, saw more modest gains in prices. We would be surprised if it had been otherwise, just as we will be surprised if this lasts very long ... If we are right about all of this, the ECB's intervention will fail to convince the markets that the underlying problems in the economies - huge fiscal deficits and a broken banking system in Spain's case - have been addressed. That means access to the markets for these sovereign borrowers will be constrained for some time."

Chinese prices climb China's annual inflation rate picked up again in July, inching up to 6.5 per cent from 6.4 per cent a month earlier.

As Carolynne Wheeler reports today from Beijing, food prices were the main culprit, rising 14.8 per ceent on an annual basis. Pork prices, in particular, have shocked buyers, climbing by more than 56 per cent.

China has moved aggressively to keep inflation in check, and many analysts believed it was near its peak. The latest numbers, released with a series of others today, mean Beijing may be loath to jump in with hefty stimulus measures should the global economy slump, said Benjamin Reitzes of BMO Nesbitt Burns.

Still, today's readings suggest China's economy, the engine of global growth, is still strong.

"Markets are acutely concerned about the global economic outlook and the overnight data provided little encouragement," Mr. Reitzes said.

"China's July economic data disappointed. Industrial production rose 14 per cent year over year, retail sales climbed 17.2 per cent year over year, and fixed asset investment was up 25.4 per cent in the first seven months of the year, but all were below expectations and slowed from the prior month," he said in a research note. "Despite the relatively soft data, these figures are still consistent with solid growth in China, and suggest a soft landing scenario remains intact."

U.S. productivity slips Not that you can blame them, but American workers have been somewhat less productive for half a year now, which could pressure employers not to hire.

Productivity in the second quarter slipped 0.3 per cent, the U.S. Labor Department said today, following on the drop of 0.6 per cent in the first quarter. Labour costs, in turn, climbed 2.2 per cent in the the past quarter.

"The fall in U.S. non-farm productivity and rise in unit labour costs in the second quarter does not bode well for either corporate profits or the jobs outlook," said Paul Dales, senior U.S. economist at Capital Economics in Toronto.

"The 0.3-per-cent annualized fall in productivity was the second drop in a row (the first quarter's rise was revised to a 0.6-per-cent decline) and was due to output rising at an even more modest rate than employment. This suggests businesses have largely exhausted the efficiency enhancing measures that, even after some large downward revisions to the back data, resulted in impressive average annual productivity growth of 3.3 per cent over the last two years."

Dorel slips Canada's Dorel Industries Inc. says the softening U.S. economy helped push down its second-quarter results.

Dorel's profit slipped to $23-million (U.S.) or 70 cents a share, dilute, from $32.9-million or 99 cents a year earlier. Revenue, though, climbed almost 2 per cent to $619-million.

Its recreational and leisure business performed well, said chief executive officer Martin Schwartz, though its juvenile division was hit. Dorel makes juvenile products and bicycles.

"Costs in the first half of 2011 are higher than last year, and given the highly conservative spending of today's typical consumer, initiating price increases to our customers is a challenge, particularly within our juvenile segment in the U.S.," Mr. Schwartz said.

"While the economic climate in Europe remains difficult, notably in southern Europe, Dorel Europe is protecting or increasing its juvenile products' market share."

Where S&P cut This is, overall, an extremely gloomy business report, so I offer you this: Even the lads who stormed Iwo Jima haven't escaped the attention of Standard & Poor's.

Along with the overall downgrade of America's debt, the credit rating agency also trimmed its measures for several government-related bodies. Among them were the Marine Corps Community Services, also to double-A, the Army and Air Force Exchange Service, and the Navy Exchange Service Command.

These aren't the actual military groups, but rather their support services.

From today's Report on Business

Report an error
As of December 20, 2017, we have temporarily removed commenting from our articles. We hope to have this resolved by the end of January 2018. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to If you want to write a letter to the editor, please forward to