Wednesday's double-barrelled attack on inflation may fall short as markets gyrate

While Canadians wait to see whether interest rates really will begin to rise tomorrow, it might be reasonable to ask what all the fuss is about.

As a friend commented last week, when we were discussing the double-barrelled pronouncements on inflation and interest rates from both Ottawa and Washington coming Wednesday, a quarter-point increase on interest rates doesn't really seem like much of a difference.

But after markets were taken on a wild ride Monday, coming after what had already been the worst week in more than a year, you have to ask yourself why traders seem so nervous.

And to bring it home to heavily borrowed Canadians: What impact will the mere threat of a small rate raise have on me?

Those dubious of the importance of a tiny increase in interest on things like the housing market might also ask why Bank of Canada governor Tiff Macklem and his counterpart at the U.S. Federal Reserve, Jerome Powell, have been so reluctant to actually pull the trigger and raise rates.

Despite haywire markets, there are many who doubt interest rates will rise tomorrow, when those central bankers both hold monetary policy announcements.

Most commentary seems to suggest Powell will put off making a move on rates at least until spring. And those who trade in interest rate futures, making predictive bets on such things, imply there is only a five per cent chance the Fed will alter rates currently near zero at tomorrow's meeting.

Macklem may have reasons of his own to delay a move that would make Canadian exports more expensive in our biggest markets. Those same predictive markets that saw a 75 per cent chance of a hike last week — when inflation rose to 4.8 per cent — have scaled back their outlook to 63 per cent. Expect another re-evaluation after Monday's wild ride.

But whether or not the central bankers act on Wednesday, or bide their time once again, the question remains: Why are small changes in interest rates so powerful?

The question applies not just when rates are about to rise, but also when the cost of borrowing is falling, even if being artificially held down by most of the world's central banks.

It also comes as a new book titled The Lords of Easy Money: How the Federal Reserve broke the American Economy is grabbing lots of attention in the financial press; it's about a central banking voice-in-the-wilderness who warned that the repeated use of low interest rates to keep stimulating the economy would eventually have dire consequences.

The book profiles Thomas Hoenig, an otherwise straight-laced, conservative president of the Kansas Fed, one of the regional reserve banks that collectively make up the U.S. Federal Reserve system.

As the book's author, financial journalist Christopher Leonard, writes, Hoenig worried that endless low rates linked to the Fed's quantitative-easing policy would be the opposite of Robin Hood: They would give to the rich in a huge financial bubble, while robbing the poor and middle class.

And he worried that eventually it would all come crashing down.