HIGHLIGHTS OF THE WEEK – Dec 21
• Seven years after lowering its policy rate to near zero, the Federal Open Market Committee (FOMC) voted to raise it by 25 basis points, effectively ending the era of zero interest rate policy (ZIRP).
• Markets took the rate hike in stride. Several central banks matched the Fed hike the next day to stem depreciation and/or potential capital outflows. All in all, the U.S. dollar, Treasury yields, and equities all rose mildly on the week, while oil slumped on a huge inventory build in the U.S.
• U.S. economic data was supportive of the Fed’s decision with core CPI notching up 0.2% on the month, single-family starts reaching another cyclical high, and jobless claims paring back after an unusually active week. Still, we expect future hikes to be prudent and gradual, as per Chair Yellen’s statements.
• The rate hike by the Federal Reserve will have implications for Canada – particularly through financial linkages. But the reason that the Fed increased rates – that the American domestic economy is strong enough – is good news for Canada.
• Diverging monetary policies in Canada and the U.S. will continue to support the greenback and weigh on the loonie. We expect the Canadian dollar to remain around 71 US cents through the first quarter of 2016 before rising gradually thereafter.
• Longer-term bond yields in Canada are closely tied to those in the United States. The normalization of monetary policy in the U.S. will ultimately lead to higher yields there, and is expected to spill over to higher yields here as well.
For further information, please contact:
John Maveety Manager, Residential Mortgages – Greater Ottawa Area TD Canada Trust
T: (613) 371-1984 F: (888) 899-1984 P: (866) 767-5446