Much as had been expected, this soft patch proved to be short-lived. Accordingly, the Federal Reserve has followed the June policy move with similar actions at each meeting since then, including our most recent meeting earlier this month. The cumulative removal of policy accommodation to date has significantly raised measures of the real federal funds rate, but by most measures, it remains fairly low.
Unfortunately, we in Canada didn’t recognize the full implications of the energy crisis. We were slow to realize that higher oil prices also meant a reduction in the economy’s production capacity. Canadian policy-makers tried to cushion the impact of the higher energy prices and slower productivity through increased transfers, subsidies, and easier monetary and fiscal policies.