The Fed’s recent announcement keeping the overnight rate unchanged should reassure Canadian brokers, says one industry expert here.
“This is good news for Canada, where the economy is much weaker than in the U.S. and where the Bank of Canada is at least a year away from tightening,” says Dominion Lending Centre’s Chief Economist Dr. Sherry Cooper. “Chairman (Janet) Yellen mentioned Canada specifically in her press conference, suggesting that the slowdown in Canada arising from the oil price rout is important as Canada is ‘an important trading partner’ with the U.S.”
Clearly, says Cooper, interest rates will remain low for a long time and when they do rise, they will do so only gradually.
Currently, inflation in the U.S. over the past 12 months is only 0.3%, well below the Fed's target of 2%. Much of this is owing to the strengthening in the U.S. dollar and falling commodity prices. Also, despite tightening labour markets, wage gains have remained extremely muted.
By holding the benchmark federal funds rate at zero to 0.25%, policy makers revealed their continuing uncertainty that inflation has not moved back to their 2% target, despite gains in the labour market.
Recent losses in China's equity markets reflect deeper worries over growth prospects for the world's second largest economy, says Cooper.
“Slowing growth in China has helped to trigger a dramatic drop in commodity prices, especially oil, which has put further downward pressure on U.S. inflation,” she says.
Federal Open Market Committee (FOMC) members revised down their expectation of unemployment this year a few basis points below the current level of 5.1%. Inflation expectations were revised down, as were projections of the federal funds rate, even though growth is expected to perform well.
Most participants expect the Fed to raise interest rates this year, although four Committee members expect the first increase to be delayed to 2016. Richmond Fed president Jeffrey Lacker dissented with the Committee's decision, saying he preferred to raise the target rate by 0.25 percentage points now.