This week, the U.S. Federal Reserve announced that it will leave the federal funds rates unchanged at a range between 1.5 to 1.75 per cent. In a statement following the announcement, the Fed expressed confidence saying that the information it received since the Federal Open Market Committee (FOMC) meeting in March indicates the labor market has continued to strengthen. The Fed also remains confident about inflation staying on target, stating that the “stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to two per cent inflation.”
New chairman’s second announcement
The announcement comes after a two-day policy meeting. It is the second for newly-appointed Federal Chairman Jerome Powell, who raised rates at his first meeting in March. The Fed says household spending has moderated, business investment in growing strongly. This along with strong job growth and low unemployment is encouraging the Fed to leave rates where they are.
Central bank could raise rates in June
Though rates were kept the same this time around, there is indication that the Fed will raise rates sooner rather than later. It expects that economic conditions will evolve in a manner that will warrant further gradual increases in the federal funds rate.
The Fed says “the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.” It is expected that the Fed will raise rates twice this year, starting at the June 12 – 13 policy meeting.
The decision to put a stay on rates came as expected and had little impact on the stock markets or bond yields. The Fed did not mention current trade tensions between the U.S. and several other countries, including Canada. The future of NAFTA still remains unclear, which, if changed, would have a major impact on Canada’s trade relations with the U.S.
Impact on Bank of Canada rate
In its last announcement, the Bank of Canada kept rates steady at 1.25 per cent. Rising debt levels, weakness in the housing sector and trade tension were some of the reasons why Canada’s central bank said it left rates unchanged.
In a note emailed to journalists, BMO Deputy Chief Economist Michael Gregory made three observations about the FOMC policy that points to a June rate hike.
First, the policy now mentions, “On a 12-month basis, both overall inflation and inflation for items other than food and energy have moved close to 2 percent.” In months before, the Fed has said inflation “continued to run below” two per cent, indicating that inflation is trending upwards in the States now.
Secondly, the FOMC says “Inflation on a 12-month basis is expected to run near the Committee’s symmetric 2 percent objective over the medium term.” Before the Fed said it expected inflation would simply “move up in coming months” and “stabilize.”
Third, and perhaps most importantly, the Fed now says it is no longer “monitoring inflation developments closely.”
Gregory said this change in tone is indicating the U.S. is another step closer to a June rate hike, and he believes there will be three total moves before the end of the year.
If the Fed does raise rates in June, this will put a stronger spotlight on the Bank of Canada to follow suit, making borrowing more expensive for Canadians.