This is a really good episode

Paul Beaudry: The exchange rate relations is kind of one of these things that is very unstable. I’ll always admit that it’s one of the hardest things to predict. And that’s one of the reasons the bank tries not to get into any debates about predicting the exchange rate. You’ll very rarely hear them kind of predicting where it’s going to go.

Ian Pollick: Welcome to another edition of Curve Your Enthusiasm. My name is Ian Pollick and we have a first here on Curve this week. Not only are we joined by our first ex-Central banker, but this is the first episode where we have two guests. Three definitely won’t be a crowd because we do have a ton to talk about and I’m joined by two very extraordinary people today. I’m joined by Paul Beaudry, Professor of Economics at UBC and former Deputy Governor at the Bank of Canada. And the rest of you will know and be familiar with Ali Jaffery, Senior Economist from CIBC Economics. Chaps, first off, welcome to the show and Paul, it’s very exciting to have you here.

Paul Beaudry: Really happy to be there.

Ian Pollick: And Ali as well, we’re very happy to see you too.

Ali Jaffery: Always happy to be here.

Ian Pollick: Listen, we have a massive week of data ahead. We’re coming off in a very, very important two weeks of data with some key learnings. And it’s been enough to reprice the market in a pretty meaningful way. You know, revisions are an analyst’s worst enemy. In the past two weeks, we’ve learned that US savings rate is not as low as we thought. The level of GDP is almost a full percentage point higher than we thought. And the slowdown on hiring isn’t as linear as we thought. And so naturally this does beg the question whether or not we are going to get another 50 basis points in November or if we’re going to see another 50 at all in this cycle. And so Paul, let’s start off the episode by asking a very simple question. What is your read of the Fed, what they did and how they characterized it?

Paul Beaudry: Well, first of all, you really have to kind of see everything in that context, not only in that very short term. There’s a real whole set of preconditions that the Fed was looking for to be able to lower rates and a lot of those preconditions were coming in. Obviously, the labor market was maybe the one that was getting the most attention of kind of feeling that that was soft in the US, but there was a lot of other kind of good news on the price front that really seemed to be saying things are kind of lining up to get back to that 2%. So when there was a change, it really wanted to say, we’re really convinced now, kind of preconditions are there to get back to the 2% inflation target. And the 50 basis points was really trying to confirm that, really making it very clear. They could have done it otherwise, they could have done a 25 basis points decrease and then really saying, you know, there’ll be aggressively cutting. But this gave that signal that really things have turned around. But at the same time, as you say, there’s been data that’s come in in the past little while that’s a bit stronger. I don’t think that should change very much the kind of general trajectory. It does kind of reduce the chance of another 50 basis points. I think that’s most likely off the table for maybe the next decision. But the overall path is pretty clear. There’s really a lot to kind of say this is time to kind of cut rates and let the economy keep on growing and things are in a good direction there.

Ian Pollick: I mean, this is the crux of what’s happening in financial markets and why it’s such a difficult market right now, because we can all look at the end point and say, you know what, whether it’s the Bank of Canada or the Fed, that end point makes sense, but the distribution or the path towards that end point has so much uncertainty. And so maybe, Ali, I’m going to pull you in here for a second. And what did you see in the jobs report last week? Is there anything that raised an alarm for you?

Ali Jaffery: Well, I think the main takeaway for me is that we don’t have an obvious slowing trend right now. Like we saw that a few months ago and we saw a step down, but if you take an average over the last three, four months, it looks stable at a lower level. That’s still modestly above estimates of breakeven. Obviously the wage data was pretty hot as well. So I take a step back and say US labor market is fairly healthy from this report. Obviously it’s one in and there’s some froth in some sectors, you know, leisure and hospitality was really solid. Retail was solid. And that seems a bit unusual given how weak they are. So there might be a little bit of a cyclical upturn just in this month that could fade. But overall, you know, I walk away thinking the U.S. labor market is healthy. Yes, it’s still likely to cool further, I think. But we’re not at a point where the U.S. job market is breaking at all.

Ian Pollick: So let’s just talk about this within the context of our forecast. Obviously we had this very large and rightfully so reaction in the bond market. It’s been triggered of course by some of the developments geopolitical and whatnot. But within our forecast, I was looking for another 50 basis points from the Fed in November. What are your thoughts now?

Ali Jaffery: I think I agree completely with Paul that that seems not likely and we expect the Fed to move in 25 basis point increments for the rest of the year. And I think a lot of it has to do with the revisions you mentioned that if they’re in this kind of data dependent position, they don’t need to rush and Powell has already said that. So I think 25 is a better base case.

Ian Pollick: So Paul, let me ask you this because a lot of the questions I’m getting from clients is, sure, maybe this is an overreaction, but it’s very clear that the necessity for a non-standard size cut maybe has been diminished. Is it weird for a central bank to deliver a profile of a 50 basis point cut, then go back to 25, then go back to 50 in a steady state world where things aren’t getting terribly worse? Can we just say the path is weird, therefore they won’t do it, or is that too ignorant?

Paul Beaudry: I don’t think that would be the preferred way of going 50, 25, 50. If you really want to go, you’d prefer to go 50, 50, and then 25 and have a little bit of consistency across there. At the same time, if they really felt that they went 50, 25, and then all of a sudden labor market really looked bad data and there’s really things that were turning around. I don’t think they’d shy away from going back to a 50 if they felt that was necessary, but it certainly wouldn’t be the type of path they’d be looking at and kind of thinking, well, let’s go 50, then 25 and 50. They really wanted to give it a boost. They’d go right away to the 50. That’d be my take.

Ian Pollick: Okay, so let’s bring this back to Canada. This is where the expertise is. And so right now, when we think about the Bank of Canada, there’s a very obvious narrative. And that narrative is the Bank of Canada, the Canadian economy is not doing great. The bank should take rates at least to neutral or below. And the commensurate thinking is, if you’re going to do that, why wait? And so Paul, my question to you is, when you think about the reaction function, why does the Bank of Canada have to go fast? Do you believe that it does? And if it does have to go fast, are we concerned about a tradeoff where there’s a long period of time that they are on pause?

Paul Beaudry: Okay, the idea of going fast now, so again, this precondition situation is really important for the Canadian aspect and kind of interpreting it. There was a lot of things, if you were just looking at the labor market, you would have probably started cutting rates sooner in Canada, but it really, the Bank Canada wanted to make sure that a lot of other things were lining up. You want to see a bit kind of the wage growth, the kind of expectations, the pricing aspects. There’s lots of things that didn’t want to see kind of going the other way. When that whole set comes into play, then it’s the idea of saying, okay, now we can cut and trying to give as much kind of that stimulus back because, you know, as you said, the Canadian economy is really kind of slow right now. There seems to be excess supply. So there’s no reason just on the tightness side not to cut quickly. And so that’s what was holding it back was all these other parts. The bank is pretty confident that we’ll get back to the 2% inflation target and therefore it can cut. And there, at this point, there really is the idea of kind of getting that message across and getting to Canadians to be more optimistic and more kind of confident about things. In some ways, a large part of that stimulus is already baked in. We see longer rates have already come down, so that’s kind of playing. But it still is that these headline rates play a way in the confidence and kind of getting that quickly is a good message for Canadians and kind of getting both businesses and households feeling more optimistic about the future.

Ian Pollick: So here’s the question, let’s just go a little bit deeper on that. So let’s say you’re in an environment where we’ve hit the nail on the head, the Bank of Canada cuts rates relatively quickly, we get down to a level that is a little bit below what their estimation is of our star, so below 275. If you get there, do you lose credibility by maintaining that level for a long period of time because maybe you lose a little bit of firepower, you have some FCI tightening offsetting the speed by which you’ve gotten to that level? Do you believe that matters or not?

Paul Beaudry: I don’t think you lose credibility at all. You want to get back to there and kind of get to that point exactly. Actually, the credibility will really be in this kind of combination of being able to bring inflation back down to target. That’s really where the credibility is without having kind of created, you know, a recession or different aspects like that. That’s the aspect that’s really important. Once you get to the kind of like that neutral range, then it’d be a kind of natural part to start pausing and kind of seeing how the economy is reacting to all that. So I don’t see that as at all a kind of problem of credibility once it gets there. Yeah, so that’s why I think it’s all in one direction now. Very much in the same logic of the kind of front loading that happened on the upside. There was really a lot of worry at that point with expectations and different things and the tightness in the market and there was a lot of reasons to move fast. Now a lot of those things are kind of moved the other side and there’s kind of good reasons to come back and get back to close to neutral as quickly as possible.

Ian Pollick: Okay, so Ali, I’m going go back to you because you did a paper a while ago and kind of showed that when you’re in this environment where you’re not in this financial accident and you’re in maybe a little bit more than a normal slowdown, you do get back to neutral on a gradual basis. Is there any reason for you to think that that’s not going to be the case this time, i.e. are we going back to pre-pandemic levels ,175?

Ali Jaffery: I think that the bank, similar to what Paul was saying, I think that there’s a case for accommodative policy here. And I agree with Paul, they should move fairly quickly in this environment because inflation is at 2%, underlying inflation is roughly speaking, their momentum basis. Output cap is a little over minus 1%. Unemployment rate is also showing similar amount of slack and probably worsening. And I don’t see a case right now for restrictive policy at all right now in Canada. It’s a matter of how quickly though you get back to that neutral range or if not move to the accommodative range. So that’s kind how I see it. And just kind of go back to Paul here for a minute. Paul, how quickly do you think, you know, the bank should move to a neutral range, thinking about the October decision and the rest of the year?

Paul Beaudry: So I think in the October decision, I wouldn’t be surprised for a 50 basis points. And even with the news in the US that may have changed a little bit, the kind of view for the Fed, I don’t think that changes much for Canada in the sense that these are really, it’s Canada direct basis here. The preconditions were there to kind of start moving down. You want to move that down quickly. I would really bet on a kind of 50 basis points. Obviously they might decide to kind of go that more gradual route, but I don’t see any kind of case right now for not trying to bring that down quickly. And again, for people to understand, there’s really, you when you want to turn things around, you want to get the confidence going. And I think kind of going quickly would really help in that Canadian confidence.

Ian Pollick: Well, let’s just talk about that confidence for a second because you take a step back and I think one of the very important features of the cycle was that when rates were being hiked, you had short-term interest rate hikes priced at the same time as medium-term interest rate cuts, which you’ve never had before in any other cycle. And so what that meant is that term yields never actually rose as much as they should, but there’s symmetry behind that because when yields are falling, they’re not falling as fast as they need to because the repricing of whether it’s terminal or neutral rate expectations. Yes, rates have fallen, but not nearly as much as if you were coming off a very clean and uncorrupted hiking cycle. And so that begs the question: in an environment where yields are unlikely to fall materially as much as you would see typically. Borrowing rates for the economy, like five year mortgage rates aren’t likely to move as much as well. And so for context, we have had 75 basis points of cuts in Canada. Five year mortgage rates have fallen 70 basis points, maybe 65 basis points. In a world where the market’s now looking for an endpoint of 230 for the Bank of Canada, how much can you reasonably expect mortgage rates to fall? That is the question I get from investors all the time. And so what I want to pose to both of you gentlemen is in a world where you have economy wide borrowing rates that are not falling as fast as the overnight rate, what does that mean for the Bank of Canada? Do they have to exaggerate that by going even further below neutral or is this just a steady state they have to get used to?

Paul Beaudry: I think it’s a lot this steady state to get to get used to is kind of like thinking they want to move back to neutral and in some sense they want those long-term rates to back to neutral and they’re kind of moving in that direction so we’ll see the long-term rates kind of going in that the long-term rates have already shown a lot of that so they’re already pricing that in and that’s actually a good thing. So you’re exactly right. You don’t get as much on those long-term rates as you decrease these short terms because they’re already taking that into account. And that’s already a good thing. You know, in the last few decisions, the path has been clear and there’s been a lot more stimulus. And in that sense, I think we’ll see kind of this mood in Canada changing both because of the kind of short run decisions, but people still feel those long term rates. People that are coming up for renewals on their mortgages certainly feel it. Like they’re very happy to kind of see this extra part that’s kind of coming in and really helping them and making that a lot easier then. Maybe they were predicting even three to six months ago.

Ian Pollick: But that’s the question, right? Like, and on an absolute basis, yes, people are getting a little bit of relief, but it’s not a huge amount. And so I wonder from the bank’s perspective, if the whole goal here is to try to provide confidence and you maybe get a little bit of love coming from mortgage rates that are maybe a little bit lower than you thought, but ultimately on an absolute basis, aren’t going to be as low as people want. Does that restrict that policy transmission? And what do you do with that?

Paul Beaudry: Again, that’s a bit the definition of the neutral rate. The neutral rate is the rate that you’d kind of get it back to the right level. I think, if I’m understanding a little bit, you’re kind of hearing also people questioning what is the right neutral rate. Now, the right neutral rate could be lower than the band that the bank is thinking, but getting that neutral rate right is difficult. People might say, you know, it’s at two or, you know, 175, like you say, of pre-COVID type of areas where we’d be. But that’ll take a bit of time to figure that out. So it’s kind of going into the range of where it feels that this is kind of a reasonable type of number. Now, you have to remember, you know, going back, so rates, even if they’re, let’s say, you know, the terminal rates we’re talking about right now, kind of 225, or kind of that range, or 250, suppose before the pandemic, you know, these rates were 175. We’re talking 50 basis points or so above that pre-pandemic. That’s not an extreme type of level and people can kind of get to that and kind of, a lot of people are fine. Even people that kind of took out mortgages when they were really low in 2020, kind of were guessing that they wouldn’t stay when the five year would come up at the end of that. They kind of probably thought, we’ll probably be back to somewhere where we were at the pre-pandemic. So they are already thinking probably somewhere around 175, two there. And that seems to be the type of aspect. like I say, the kind of view of the neutral rate is now a little bit higher than that, but it’s kind of still very hard to kind of get a good idea of that neutral rate. So there I see, things will go fast until we get into that zone. Then there’ll be a little bit of searching. And I think that searching actually for Canada, it’s kind of pretty clear to want to kind of go that down pretty quickly and get there. For the US, I’d say some of the pricing at the farther end is kind of more questionable. It’s there, there’s even more room to kind of think the neutral rate in the US is maybe a bit higher. And when we see some of this aspect, you know, that the economy in the US is doing well and everything, even at these rather high rates. So you kind of reduce that by, you know, another 100 basis points or more. It might be we get close to neutral already.

Ian Pollick: For sure. And listen, I think we have a huge risk coming up in six weeks, which is the US election, which seemingly is off a lot of people’s minds, given some of the other recent events. And for longer term interest rates, that’s very, important because this whole idea of fiscal expansion, is it funded or not? That hits long-end term premiums. And that ultimately has a spillover impact for Canada, even if we have nothing to do with it. So what I want to do is pivot a little bit more to the near term. And so it’s a huge data week ahead with the Business Outlook Survey and jobs at the end of this week. The jobs report is very interesting coming off the back of the federal of the US jobs report last week. Maybe can you guys give me just a two second view of what is going on in Canadian’s labor market right now?

Paul Beaudry: The aspect is it’s weak. There’s lot, there’s slack now in the Canadian labor market. There’s nowhere at a kind of about a percent higher unemployment rate than we usually could think that we should be able to sustain. So even if things came out a bit stronger in this next report or things, I don’t think that would change the Bank of Canada’s view extremely. I think they kind of know the level is there. There is slack there, so there’s room to decrease. Again, I’d be pretty kind of that dovish part that there should be kind of a really aggressive cut. And I have trouble seeing how, unless it was really on the inflation side, you really see like kind of underlying inflation really turning around or doing something really bad. I think that would be the only type of thing that would change the general view. The labor market aspect, just getting a bit stronger reading, I don’t think would change the overall because it’s really the level of what’s happening in the labor market that’s important.

Ian Pollick: So, I mean, I think you brought something up that was very important. You know, unless this address a very big issue happening right now. Obviously we have energy markets that are pricing in a bit of a shock. That shock can get worse or maybe transitory. We just don’t know yet. And so I think the question that we’re receiving a lot is how is the bank thinking about a rise in oil prices, a rise in gas prices, even though the level of oil is below what they had thought in the previous NPR. The speed by which oil is repricing and the length and persistence of that repricing may be a bit sticky. How should we be thinking about a mini shock like we’re seeing today versus an escalation if it turns into something larger for the bank? Like, does it hurt 50? Does it help 25s? Ali, I’ll start with you. How do you think about this?

Ali Jaffery: Yeah, so it’s when thinking about oil price shocks and their impact on the economy, it’s important to take a step back and ask why oil prices are moving in the direction that they are. So in this case, we have kind of, you know, risk premium or speculative storage demand shock because, you know, disruption and potential disruption in oil supply. What that typically does is yes, oil prices can spike, but that spike doesn’t really last very long. And this kind of geopolitical premium actually has decreased over the years. We’ve seen a lot of stress around Iranian oil supply over many years. So the market is accustomed to it. And so the impact of that is a bit short lived. Net energy exporters like Canada should on the margin benefit a little bit, but that benefit is far less than, for example, you have a positive if oil prices rise because of a big positive demand shock that the global economy is doing well. those shocks are typically larger in terms of rise more and they’re more persistent. So I don’t think it would radically alter the calculus for governing council of the Bank of Canada. In fact, you know what the bank does is they take a six week moving average of oil prices at a particular time. And as you mentioned, you know, the last two MPRs, they had it at 85. I think oil prices are in the low 70s right now. So they take into account judgment about where oil prices could be based on certain risks. But just the magnitudes we’re thinking about, it doesn’t look like a very radical change to their projection and their overall thinking unless you see something fairly dramatic and there’s evidence that it could be more persistent. But even then, you know, so that would probably be a small positive for the energy sector in Canada. you know, we’re seeing as a whole, you know, all these things we’re talking about, the labor market is fairly weak. Price pressures have abated. I think the broad calculus, it doesn’t change too much.

Ian Pollick: Paul, I want to switch this over to you for a second because if you think about the components of an energy shock, as you have a positive terms of trade impact, but you have a negative hit to consumption, in your mind, how should we be thinking about this move in oil? Do you agree with Ali or can you give us a bit more of a granular view on how the bank should think about it?

Paul Beaudry: Basically I agree with Ali, except for the part that I kind of emphasize even more the idea of looking through in the act. The bank really tries to kind of emphasize how much it tries to look through some of the high frequency movements in headline inflation and really looks at some of these core measures. So you start getting much more worried if you were seeing both oil and other aspects, let’s say food or different things happening in the world market at the same time. Then you have something really to worry. When it’s only kind of in one sector, so if it’s only oil, that can kind of look through because that doesn’t put a pressure, and people understand it. People aren’t happy about seeing kind of gas prices go up, but they understand the difference that that’s a very kind of sectorial aspect and kind of can see through that. And the Bank of Canada tends to kind of downplay that and really looking at if there’s kind of pressures across a broad base kind of basket. And when there’s only oil that allows you to kind of look through. But this goes on the other side too, and the flip side. Over this period, if you’d kind of go back a bit, there was the idea that actually oil might be kind of even pushing headline a bit below 2% over the next little while. That’s probably not likely now with a little bit of the news that we’ve had. But that was also kind of being pushed of saying, don’t just look at that. Really look at some of these core measures. They’re still a little bit above the 2% and they’re coming down to 2%. And that’s really the type of things that the bank would be looking at.

Ian Pollick: OK, so let’s talk. Let’s switch gears a little bit. When we started the easing cycle, you know, one of the big narratives around the divergence story to the Fed was, the bank can’t cut rates that much. The Canadian dollar is going to weaken, is going to introduce this secondary pass through of inflation. And you had Governor Macklem kind of say, listen, we know there’s a divergence story and there’s limitations to that divergence. We are nowhere close to those limitations right now. The Canadian dollar has been exceptionally stable for the past six months. It is one of the most shortest currencies in the world, and yet it has shown marked stability. There’s a lot of reasons potentially for that. But I’m going to go back to something you said earlier, Paul, about getting to that neutral level at a bit faster pace and that the US neutral rate may be even higher as evidenced by the move in longer term rates. When you think about those movements in our star and our star pricing, how do they affect the exchange rate relationship? And has that changed over the past few years in your mind?

Paul Beaudry: Okay, the exchange rate relations is kind of one of these things that is very unstable. I’ll always admit that it’s one of the hardest things to predict. And that’s one of the reasons the bank tries not to get into any debates about predicting the exchange rate. You’ll very rarely hear them kind of predicting where it’s going to go. At the same time, I do think this divergent story is kind of important. You can’t diverge too far, but we’re not talking in a range that’s kind of this problematic. Even when we’re looking at the pricing right now at that, you know, in two years, we’re talking, let’s say, a 50 basis points difference. That’s in kind of a very reasonable aspect. And the Canadian dollar’s often been very stable to that and can kind of make it up kind of further that. So even if, you know, the U.S. might not come down quite as quickly, again, just that the idea of because it looks so robust and everything in the U.S. might not come down as quickly as Canada, I don’t think we’re talking in a divergence that’s so important that really would affect this Canadian dollar that’s just as you said, it’s just been very stable.

Ian Pollick: So I want to ask you one more question and this is for the haters out there who say, you know what, the Canadian dollar is just so stable. It gives the Bank of Canada so much room to go faster. Regardless if the bank goes faster or not, would they ever look at the Canadian dollar being stable and say, you know what, we can push this a little bit. Like, is that crazy?

Paul Beaudry: I don’t think it’s crazy. It’s kind of one element among many and again the bank tries to not kind of over you know react only to exchange rates or something but you know it’s one element like so if you have a lot of things on one side and on top you’d have a kind of depreciating currency where you’d think there’d be pass through on that side that’d be an extra part. Now when you don’t see the depreciating currency and you see it quite stable it allows you to be kind of confident that that’s not an extra problem so again in those kind of preconditions that allowing this kind of fast decrease, that’s one more element that supports that kind of narrative and making it happen.

Ian Pollick: Okay, I did not expect you to say that, but I’m glad you said it and so everyone can hear. I think Ali, if you have any thoughts on that.

Ali Jaffery: While we’re talking about haters, I wanted to take this opportunity to ask you Paul because we get this question asked to us a lot from clients about how much the bank weighs market pricing in their decision. Because right now the market is pricing is slightly above normal sized cut for October and the haters always say that the bank likes to surprise the market. How would the bank approach market pricing in this decision potentially, but in general? How was it weighed amongst the various inputs?

Paul Beaudry: I’d say it’s a rather small component. The bank doesn’t want to try to surprise markets. The bank is really always trying to communicate where it’s doing and it’s trying to be very honest what it tries, where it’s going. At the same time, when it takes a decision at that point in time, it really tries to figure out what the data is saying and what’s the best for the Canadian economy. If that turns out to have to surprise the market, it’ll do it what’s the good thing for the Canadian economy. At the same time, it’s not trying to surprise the market. It really kind of goes out of its way to try to say as much as possible without committing itself to kind of a fixed path, where it sees things, how it’s interpreting things. So that’s the continual part. So it really doesn’t like to surprise the market, but it’s ready to surprise the market if it’s needed given the data.

Ian Pollick: And we have obviously seen that in the past. But my question to you is this. We had very little socialization of a non-standard sized cut until it really started to become, you know, very evident in the US that maybe the Fed was going to do it. And so once the U.S. started to price it, Canada started to price it. But up until that point, no one had seen the urgency to price that in for Canada. And so from the Bank of Canada’s perspective, they had never talked 50s. All of sudden, 50s are introduced in another economy and it is now being absorbed into our market pricing. They don’t seem to have been walking it back or necessarily embracing it per se, but you know, this is almost like it’s a foreign entity that’s now been absorbed into our domestic pricing. So why do they have to pay any attention to it at all?

Paul Beaudry: Again, I think what they’ve said is they really want to get rates down rather quickly. I mean, it’s recognizing again that these conditions are there that you can say we’re on track to get inflation back to the 2%. Everything’s good. So we can take this. I do think it’s giving a little bit of an extra part of noticing, 50 is probably going to be absorbed quite well by the market. The exchange rate’s doing fine with that and everything. And so I do think they’d like to get down there kind of quickly now that you have these preconditions and that opens the door. And so might as well take it and take advantage and feel that’s a good thing. Now, whether they’ll do it, I don’t know. But I do think it kind of helps and kind of opens that door.

Ian Pollick: Okay, no, that’s great. And so let’s just talk about another door. And this is a door that I have a huge problem with. Regular readers know my view on this, but let’s just talk about quantitative tightening for a second. At the highest level possible, without getting too micro in the details, my question to you is this. When the Bank of Canada thinks about their balance sheet, and obviously this is the first cycle where they have gone through balance sheet expansion, they’re rapidly trying to lower the size of their balance sheet, what are the benefits or disadvantages of having a permanently large balance sheet in a country like Canada?

Paul Beaudry: So again, when you have a big balance sheet, it’s basically as if it’s the Bank of Canada that’s managing part of the liquidity for the overall system. So it kind of takes on all this kind of duration risk on its balance sheet. And that’s not something the Bank of Canada wants to do. They want, you know, kind of the market to kind of manage its liquidity properly and it’s ready to help. And there’s all sorts of, you know, facilities that are made to help that when it’s needed. But the overall, it wants to get the market to kind of manage its liquidity itself. And an oversized balance sheet was exactly in a period where the system needed a lot of liquidity and that was helpful. As we go back to something normal, that’s going to make people have to relearn to kind of manage a bit their liquidity. And that’s always a little bit of a problem, but that’s where I think they want it to go. I think they want people to kind of, a lot of people in the financial market to get back to decent kind of management practices for their liquidity.

Ian Pollick: A follow up question to that is when you think about the ultimate resting spot of a balance sheet, do you calibrate it relative to the size of GDP as a proportion of bonds outstanding? Maybe you could just give us some insight to how you were thinking about that.

Paul Beaudry: So the overall balance sheet is probably the wrong way to look at it. It’s really the kind of part that is kind of the counterpart to the settlement balances in the system. Because the part that’s kind of the balance sheet that’s kind of the counterpart to kind of cash is a very different aspect, and that’s kind of a different animal altogether. So you really want to see how much you’re kind of have a big balance sheet with a lot of settlement balances that are kind of backed by different bonds that they’re buying. So that’s the part that you’re trying to figure out. And that settlement balance is you have to think before this whole crisis was very close to zero. Basically, almost gave any no settlement balances. Now, the idea of having greater settlement balances there in the system is really a kind of function of our changing payment system. And our payment system will need more settlement balances just to make it work well. And that’s the big part of the calibration. Obviously, that’s the payment system is a fraction of GDP. So you’re always looking at something. Obviously, if we’re a country 10 times smaller, 10 times bigger, you’d have a different number. But it’s really the payments needs that is being thought as the important part. How much do we need to make sure that our payment system is working well and doesn’t have any problems, that you have enough settlement balances and that liquidity in the system to make it work properly?

Ian Pollick: Okay, well, my mom said if you have nothing nice to say, don’t say it. So I’m not going to talk about QT anymore. We’re a bit long in the tooth and we have a huge week ahead of us. Paul, I just want to summarize what I think I’ve heard from you today. Number one is if we got a 50 basis point cut in October from the Bank of Canada, you would not be surprised. You would also not be surprised if the Fed did not deliver a 50 basis point cut in November. Part of the socialization of 50 in the US has spilled over into Canada and give us a bit of cover. And overall, you’re just one cool dude. Did I just get it all right?

Paul Beaudry: That seems good.

Ian Pollick: Okay, listen, everyone, thank you very much for joining. Ali, you’re a regular, thank you for joining. Paul, we’d love to have you back on the show. And remember, there are no bonds harmed in the making of this podcast.

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