Stock markets may have hit a snag, but don’t worry about a recession quite yet, says the CEO of Canada’s largest bank by market capitalization.
“I can’t see it,” said David McKay, CEO of the Royal Bank of Canada in a recent interview ahead of his appearance at Coins2Day’s Global Forum in Toronto Monday. In fact, he added, talk of financial doom and gloom could contribute to a selloff and subsequent downturn. “I worry we’ll talk ourselves into a recession. I try not to put a date out there because you might create a problem for yourself.”
His comments come at a time when U.S. Stock markets have been shaken by rising interest rates. In September, the U.S. Federal Reserve raised the cost of borrowing for the third time this year, while signaling more to come in 2019. The move seems to have spooked investors: Between Wednesday and Thursday, the S&P 500 shed 200 points from its all time high of 2,930 points in mid-September. On Friday, though, the market began to show signs of life, with S&P 500 futures up roughly 20 points following the two-day selloff.
This week’s drop “looks more like a normal small correction in equity markets after it ran ahead too quickly,” McKay said Friday.
Much like the U.S. Fed, which is raising rates because it sees a strengthening economy, the CEO of the Canada’s largest bank thinks the world remains on relatively steady economic ground.
“My perspective here is it’s hard to see a shock to the system,” said McKay. “This is potentially just a normal credit cycle turn through higher rates.”
Indeed, by several measures the economy is doing just fine. Unemployment has hit 3.7%—a percentage low enough to suggest employers may now have trouble filling positions. Inflation, meanwhile, has remained around the Fed’s 2% target.
Though President Donald Trump has criticized the Fed’s decision to raise interest rates, blaming it for the stock market’s swoon, there’s more to the economy than Wall Street. By increasing the cost of borrowing, the Fed is regaining a powerful tool to regulate the economy. Raising rates can prevent companies and investors from spending more than they can pay back. And if this historically long bull market dip into recession territory, the Fed will be in a much better position to push it back up by lowering rates and boosting spending.
That rebalancing has made it a strange time for investors, allowed the RBC CEO.
“We’ve got one foot on the break and another foot on the gas in the Western world,” McKay said. “Predicting when the monetary tightening will stop, no one really knows.”