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Outlook half-full, half-empty

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The market loved Janet Yellen's ruminations about unemployment on Monday. The U.S. Federal Reserve chairwoman told a Chicago community agency conference the U.S. still has plenty of opportunity to reduce unemployment through low interest rates and credit expansion. Investors who had been nervous about withdrawal of stimulus breathed a sign of relief. The Dow Jones Industrial Average immediately shot up 135 points.

Ms. Yellen explained that in her view a great many unemployed people in the U.S. could find work if only companies would hire them -- and if the central bank keeps expanding credit by buying assets from the chartered banks, that is going to happen. Some unemployed people, admittedly, have no skills that employers want, but that is not enough to explain the U.S. February unemployment rate of 6.7 per cent. She believes employment can be increased until a rock-bottom unemployment rate is reached somewhere between 5.2 per cent and 5.6 per cent.

Stephen Poloz, governor of the Bank of Canada, took a very different approach when he explained the state of the Canadian economy to the Halifax Chamber of Commerce last month. Canada is suffering from slow economic growth partly because of continuing effects from the 2008 financial crisis and partly because baby boomers have been investing in their houses, not in the kinds of financial assets that allow companies to grow and improve productivity, Mr. Poloz explained. Canada's growth is unlikely to return to historically familiar rates for want of young job-seekers entering the labour market and for want of capital to finance business investment.

Both central bank chiefs are appointees of the present governments. Prime Minister Stephen Harper elevated Mr. Poloz in May 2013 to replace Mark Carney. Ms. Yellen, the nominee of President Barack Obama, took over from Ben Bernanke on Feb. 3. Independent though they are from political interference, their different approaches in part reflect the thinking of the two governments.

Both central bankers felt they had to explain disappointing results -- disappointing employment growth in the U.S., disappointing output growth in Canada. Ms. Yellen, however, focused on the opportunity the Federal Reserve has to drive employment growth while Mr. Poloz focused on new limits to Canadian economic growth imposed by the life cycle and investment choices of the baby-boom generation.

The Bank of Canada can steer a course slightly different from that of the U.S. Federal Reserve, but only slightly. The two national economies are too closely intertwined to allow much divergence of policy. The Fed has maintained a federal funds rate of zero to one-quarter of one per cent while the Bank of Canada has maintained a one per cent target rate for overnight loans. Philosophical differences in the two central banks can make only small differences in practice.

Even if their monetary policies are similar, the two central banks can differ more widely in the doctrines they advance, the expectations they arouse and the targets they set for their countries. Mr. Poloz lately has been warning Canadians not to expect too much. Growth rates in Canada may improve slightly over what we're seeing now, but nothing rates before the 2008 financial crisis. Ms. Yellen, meanwhile, has been telling her public to expect more employment growth than the economy has been giving them. She is counting on continued aggressive credit expansion to achieve that result.

One sees the glass half-full, the other sees it half-empty. Both have been talking in plain, homespun language largely free of economist jargon. Ms. Yellen tried the device much favoured by U.S. politicians of telling some stories of named individuals, plucked from obscurity for a moment to illustrate a theoretical point. Mr. Poloz used the line "the cheque is in the mail" to express his skepticism about promises of rapid economic growth just around the corner. The vivid language helped public understanding, and it also laid bare some differences of perception in Ottawa and Washington.

Editorials are the consensus view of the Winnipeg Free Press’ editorial board, comprising Catherine Mitchell, David O’Brien, Shannon Sampert, and Paul Samyn.

Republished from the Winnipeg Free Press print edition April 4, 2014 A8

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