Tiff Macklem isn’t ready to bring the same holiday cheer that Jay Powell is

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As central bankers on both sides of the 49th parallel brought their monetary policies home for the holidays last week, Bank of Canada Governor Tiff Macklem faced the kind of lamenting question that disappointed parents reserve for wayward offspring at this time of year: Why can’t you be more like your cousin, Jay?

U.S. Federal Reserve Chair Jerome (Jay) Powell was everyone’s favourite son on Wednesday, standing before a news conference in Washington and all but declared victory in the 21-month war on inflation.

He said that it’s “not likely” that the Fed will raise interest rates further. He added that officials have begun turning their attention to “the question of when will it become appropriate to begin dialling back the amount of policy restraint in place.” He and his colleagues hammered home that point with a new set of projections, showing that they expect more rate cuts next year than previously anticipated.

In response, Wall Street broke out the party balloons, toasting the Fed chair with a boisterous stock and bond rally.

Two days later, Mr. Macklem gave his own year-end speech and news conference addressing similar policy questions. His message came off as, well, less exciting.

“It’s still too early to consider cutting our policy rate,” he said. “Until we see evidence that we are clearly on a path back to two-per-cent inflation, I expect Governing Council will continue to debate whether monetary policy is restrictive enough, and how long it needs to remain restrictive to restore price stability.”

And what about expectations among the policy-setting council’s members for interest rates in 2024, a reporter asked? Yeah, that’s not something we talk about, Mr. Macklem replied. Next question.

He simply refused to embrace the same spirit of accomplishment as Mr. Powell. The question is, why?

In terms of the details, the two central bank bosses are actually saying many of the same things. Both see inflation easing, a labour market coming into balance, demand slowing. Both caution that inflation is still too high. Neither central bank has taken further rate hikes entirely off the table.

And, in fact, Mr. Macklem is dealing with an economy that is on a much slower pace than its U.S. counterpart. You could argue that the Bank of Canada might have more cause for optimism about fading inflationary pressures than the Fed, which has been handed more economic strength in the second half of this year than it had expected.

So, why hasn’t Mr. Macklem embraced the same sort of optimistic tone as Mr. Powell? Why is he being such a holiday buzzkill?

I don’t know Jay Powell, but I do know Tiff Macklem; I’ve watched him in action for three and a half years. And one thing I can tell you is that Tiff Macklem is not prone to sudden, dramatic turns.

If what Mr. Powell delivered last week was a policy pivot, well, Mr. Macklem is not really the pivoting type. With him, you’ve got to expect a more subtle, gradual, cautious approach. He’s not the kind of guy to change his tune, more like adjust his key.

And there was, in fact, a distinct key adjustment in Friday’s news conference, if you know what to listen for.

“The members [of the Governing Council] did agree that the likelihood that monetary policy was sufficiently restrictive to achieve the inflation target had increased,” he said.

For Mr. Macklem, that was almost seismic. He revealed that he and his colleagues have, in fact, grown less concerned that rates might not be high enough. It’s a small step – the kind of step he likes to take – to start clearing a path toward eventual cuts. In his own way, that disclosure might be as revealing as Mr. Powell’s pivot, even if it didn’t play that way.

But beyond the differences in personal style, there is one key divergence in the economic conditions between the two countries that could help explain Mr. Macklem’s reticence: productivity.

Canada’s labour productivity (measured by real GDP per hour worked) has declined in six consecutive quarters. Over the 12 months ended Sept. 30, it fell by 2.5 per cent. In that same 12-month span, U.S. labour productivity has grown by 2.4 per cent.

Increases in labour productivity mean that the economy can produce more goods and services without adding any strain to its supply of inputs. Which means that GDP can grow – as it has been doing in the United States – without adding inflationary pressures. Similarly, wages can rise without adding to the labour costs per unit of production, and, therefore, not be inflationary.

In contrast, Canada’s declining productivity leaves less room for the economy to expand, and wages to rise, before adding to the inflation pile. Which gives Mr. Macklem less wiggle room than Mr. Powell – and less comfort in beginning to let his policy guard down.

So, for those reasons, Mr. Macklem isn’t ready to bring the same holiday cheer that Mr. Powell is. That doesn’t mean he isn’t feeling more jolly than he was even a couple of months ago. He’s just going to require a bit more convincing – and, perhaps, some more baby steps – before singing along with cousin Jay’s tune.