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Whether or not the Bank of Canada ushers in its first rate hike of the COVID-era next Wednesday, as many economists are predicting, the cost of borrowing money is about to get more expensive, with markets pricing in up to six rate increases this year.

In the U.S., expectations are equally high that the Federal Reserve will begin hiking rates. But some warn that the Fed is misjudging the health of the recovery and risks being overly aggressive with its tightening.

It’s a worry highlighted by David Rosenberg of Rosenberg Research in a research note this week. Mr. Rosenberg, who estimates the U.S. economy is already 80 per cent through its current growth cycle, pointed out that the Fed has a less-than-stellar record when it comes to gauging the temperature of the economy and timing its rate hikes. Looking back over nearly 70 years of economic history, he found that 10 periods of sustained rate hikes were followed by recessions. In only three instances did rate hikes precede that Goldilocks feat of a “soft landing,” in which inflation and growth slowed, but not too much.

As this chart of the Bank of Canada’s rate history shows, recessions are less of a certainty following sustained periods of tightening by the bank.

It’s worth noting that Mr. Rosenberg is skeptical that the Bank of Canada will be as hawkish as some other economists expect, given that inflation, though high, remains modest compared to its peers. Meanwhile, the economy still has yet to return to its prepandemic peak even as the impact of the Omicron variant remains unknown.

Of course, if the U.S. Fed gets its timing wrong and history repeats itself, we neighbours to the north are still going to feel it.

Decoder is a weekly feature that unpacks an important economic chart

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