The US Federal Reserve (the Fed), the counter point to the Bank of Canada, increased its target federal-funds interest rate by .25% Wednesday, the ninth consecutive increase in the last year..The hike takes the Fed’s target rate to a range between 4.75% and 5% and was what most economists expected even amidst speculation the Fed would pause due to recent banking calamities..“We believe events in the banking system over the past two weeks are likely to result in tighter credit conditions for households and businesses which would, in turn, affect economic outcomes,” the Fed’s chair, Jerome Powell, said during a press conference. “It’s too soon to determine the extent of these effects and therefore too soon to tell how monetary policy should respond.”.“As a result, we no longer state that we anticipate ongoing rate increases will be appropriate to quell inflation.” .While the Bank of Canada does not operate in lockstep with the Fed, the rate decisions they each make can affect the Canadian dollar and economy if the spread between rates becomes too great..A more aggressive approach taken by the Fed will undoubtedly be a prominent factor in the Bank of Canada’s future decisions, according to Doug Porter, BMO’s chief economist..“Although the (Bank of Canada) rarely mentions the Fed explicitly in its statements, it would certainly be keeping a close eye on interest rate developments there,” Porter told Canadian Mortgage Professional, adding the bank can deviate from the Fed, “but there are limits to how far away from US policy the Canadian policy can get without causing some pretty serious damage to the Canadian dollar.”.In a note to clients, Josh Nye, senior economist at the Royal Bank of Canada, said while the Fed, “softened its tone on further increases, saying ‘some additional policy firming may be appropriate,’ its previous language called for ‘ongoing increases’ with the median continuing to point to a terminal fed funds rate of 5% to 5.25%, that is, one further hike, but 7 of 18 Federal Open Market Committee members still favour additional tightening beyond that.”.“As we noted in our preview, stress in the banking sector will tighten lending standards and do some of the Fed’s work for it. Indeed, (Wednesday's) statement noted while the banking system is ‘sound and resilient,’ recent developments ‘are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation.” .The move by the Fed was in line with consensus and market pricing, but much less of a foregone conclusion than typical Fed decisions, says Nye, adding two weeks ago expectations were a .5% increase and one week ago there were doubts the Fed would raise rates at all amid turmoil in the banking sector..“We expected a hike, but wouldn’t have argued with the Fed waiting six weeks until its next meeting to better assess the impact of recent events and any further risks to the banking sector,” says Nye..“Wednesday’s dovish tone and guidance, at least, suggests policymakers are now more mindful of the risks of over-tightening. And if the hike isn’t the last, we’re getting very close to terminal.”
