It’s looking increasingly likely that September will mark the first U.S. Federal Reserve rate hike in more than a decade. It’s anticipated that the central bank will raise rates (referred to as the “liftoff”) by 0.25 per cent next month, from the current range of 0 to 0.25 per cent.
The U.S. Federal Reserve operates in a similar way to the Bank of Canada: it manipulates rates and monetary policy to help stoke the economy during a downturn. Since before the 2008 recession, the U.S. has used a combination of quantitative easing and ultra-low rates to support borrowing. Now, positive housing and job improvements indicate the Fed is ready to make a small increase to rates. It’s opposite of the situation unfolding in Canada, where our central bank has cut rates twice this year.
As Canada struggles through what could be a second recession in seven years, the U.S. economy is poised to move forward at a faster pace than anyone has predicted. Now, the biggest concern is how would an American rate hike may affect Canada’s economy and our already sliding dollar.
Also read: Get Ready for a Lower Loonie>
A Strengthening Job Market
Economic data released this year has increasingly shown the U.S. is ready for rate liftoff. The strongest signal is the solid reading on jobs earlier this month. For July 2015, non-farm payrolls rose a seasonally adjusted 215,000, according to the U.S. Labor Department. As well, revisions showed employers added 6,000 more jobs in May 2015 and 8,000 more in June 2015 that had been previously estimated. The unemployment rate is holding steady at 5.3 per cent.
A Double Rate Hike is Possible
Economists and investors alike anticipating a September Fed rate hike; in fact, a recent Reuters survey of economists shows the Fed will probably raise interest rates twice this year. The survey says there is a 60 per cent chance the Fed will raise rates in September and an 85 per cent chance it will raise rates this year at least once. As well the poll shows economists believe there is a 55 per cent chance that the U.S. central bank will raise its short-term lending rate twice by the end of the year. “If the FOMC acts in September, there is a good possibility that it will in December as well,” said economist Terry Sheehan of Stone & McCarthy in Princeton, New Jersey.
What Would a Rate Hike Mean For Canada?
Economists are looking for the ripple effects of a policy change in the U.S. on the Canadian economy. A U.S. rate hike will almost certainly mean a stronger U.S. dollar, and that will put more downward pressure on our loonie. This would have some obvious consequences for us, including making it more expensive to travel across the border and for any cross-border shopping. As well, imported goods, like everyday fruits and vegetables, will get more expensive. But this could be good news for Canada’s resource sector as oil and other commodities are priced in U.S. dollars. Assuming commodity prices don’t fall further, Canadian oil exports could be worth more when selling to our American neighbours.
What You Can Do Before a September US Rate Hike
We should all brace for a lower loonie, as a rate hike seems imminent. If you have U.S. dollars, hang on to them – they will be worth more when the rate hike comes south of the border. As well, Canadians enjoying the low cost of borrowing should continue to take advantage and pay debt as aggressively as possible. To keep in step, when the U.S. raises borrowing rates the Bank of Canada will be looking for any glimmer to raise rates here as well.