Introduction
Central banks are among the primary entities worldwide that support the health of a country’s economy. Without a central bank, any country would face uncontrollable inflation, unemployment, and potential economic disruptions. As a result, central banks’ responsibilities include maintaining a steady level of inflation, ensuring a stable level of unemployment, and promoting sustainable GDP growth. Thus, the Bank of Canada and the Federal Reserve are among the entities that demonstrate the monetary policy tools used to achieve financial objectives.
Central Banking
Canada
When reviewing the recent statistics on Canada and the U.S., it is evident that Canada is in a worse position. In Canada, the unemployment rate in June 2023 was 5.4%, and the country’s inflation rate in May 2023 was 3.4% (Bank of Canada, 2023a). As a result of decreasing energy costs, loosening supply restrictions, and more restrictive monetary policies, inflation has been reduced (Bank of Canada, 2023a). However, core inflation is still not clearly on the decline. In response to tighter fiscal conditions and the resulting decline in demand growth during the projection period, inflation is expected to ease toward the central bank’s objectives (Bank of Canada, 2023a).
As for GDP, the estimate from the second quarter of 2023 was 1.7 (Bank of Canada, 2023b). In the second half of 2023 and the first half of the following year, GDP growth is predicted to slow to an average of roughly 1% (Bank of Canada, 2023b). This suggests a 1.8% GDP increase in 2023 and a 1.2% increase in 2024 (Bank of Canada, 2023b). Therefore, unemployment is higher due to decreasing inflation, which halts the economic boom.
The U.S.
As for the U.S., the indicators are much better when compared to Canada. For example, before seasonal adjustment, inflation rose 3.0 percent during the previous 12 months (BLS, 2023a). Moreover, the country’s unemployment rate, which was 3.6 percent, barely moved from May to June 2023 (BLS, 2023b).
Although the inflation levels are similar to those in Canada, the unemployment rate still performs better. GDP grew at an annual rate of 2.4 percent in the second quarter of 2023 (BEA, 2023). The second quarter’s growth was primarily driven by rising consumer expenditure and company investment, which were somewhat offset by declining exports (BEA, 2023). Thus, the U.S. has better economic performance and growth than Canada.
Monetary Policy
Canada
When discussing monetary policy tools, it is crucial to highlight that the countries focus on their individual instruments. For example, using its target tool, the Bank of Canada adjusts its main policy rate to achieve its inflation objective. The Bank may increase its interest rate if inflation exceeds the desired level (Bank of Canada, n.d.a). By deterring spending and borrowing and lowering credit availability, the Bank motivates banks to raise the rates on their loans and mortgages, reducing the upward impact on prices (Bank of Canada, n.d.a).
To motivate lenders to decrease the interest rates on their mortgages and loan agreements and boost economic activity, the Bank could reduce the policy rate if inflation is below the desired level (Bank of Canada, n.d.a). Another tool used by the Bank of Canada is the use of flexible exchange rates. As a result of Canada’s floating dollar, the Bank can conduct a monetary policy geared toward reaching the inflation objective while being most appropriate for the country’s economic conditions (Bank of Canada, n.d.a). Thus, the primary tool of the Bank is its inflation target.
The U.S.
The Federal Reserve employs similar tools to help sustain the American economy. Open market operations, the discount rate, and reserve requirements are all within the Federal Reserve’s jurisdiction and are used as the primary tools for regulating the economy (Federal Reserve, n.d.a). The Federal Reserve can adjust the supply and demand for balances held by banks at Federal Reserve Banks by utilizing these three tools, which influence the interest rate on funds (Federal Reserve, n.d.a). Therefore, the U.S. also uses its tools to control supply and demand.
Banking Regulations
Finally, the banking regulations of the two countries are similar. The primary similarity between the Federal Reserve and the Bank of Canada is that they both focus on ensuring the safety and stability of the banking system.
However, the difference is that the Canadian Payments Act delegates management of Payments Canada to the Minister of Finance (Bank of Canada, n.d.b). In contrast, the Federal Reserve is responsible for surveillance, reviewing, and evaluating certain financial institutions to ensure they adhere to laws and regulations and conduct themselves appropriately and securely (Federal Reserve, n.d.b). Therefore, both systems have different levels of authority despite the similarity.
Conclusion
Hence, the Bank of Canada and the Federal Reserve are among the entities that demonstrate how monetary policy instruments can be utilized to help achieve financial objectives. Canada is in a poorer state compared to the current statistics of the two countries. The Bank of Canada adjusts its main policy rate using its target tool and flexible exchange rates to achieve its inflation goal. The Federal Reserve controls the economy primarily through open market operations, the discount rate, and reserve requirements. Despite their similarities, both systems have varying degrees of authority.
References
Bank of Canada. (2023a). Indicators of capacity and inflation pressures for Canada. Web.
Bank of Canada. (n.d.a). Monetary policy. Web.
Bank of Canada. (2023b). Monetary policy report. Web.
Bank of Canada. (n.d.b). Regulatory oversight of designated clearing and settlement systems. Web.
BEA. (2023). Gross Domestic Product. Bureau of Economic Analysis. Web.
BLS. (2023a). Consumer price index – June 2023. Bureau of Labor Statistics. Web.
BLS. (2023b). State employment and unemployment summary. Bureau of Labor Statistics. Web.
Federal Reserve. (n.d.a). About the FOMC. Web.
Federal Reserve. (n.d.b). Supervision & regulation. Web.