The Federal Reserve's recent policy change, signaling caution in reducing interest rates, will have a significant impact on Canada. The Fed's move acknowledges market concerns about inflation and considers the potential inflationary effects of the Trump administration's policies.
John Rapley is an author and academic who divides his time among London, Johannesburg and Ottawa. His books include(Simon and Schuster, 2017). The central bank recently made a policy announcement that could have significant implications for where Canada ’sAfter the decision to cutthis month, chair Jerome Powell said the U.S. Federal Reserve could henceforth be “more cautious in reducing rates,” projecting higher inflation and therefore interest rates next year than previously expected.
It’s been a while in coming. Maintaining that it now has inflation under control, the Fed has been cutting short-term rates. But bond investors, judging that the Fed has jumped the gun and inflation will return and affect the fiscal health of the U.S. government, have been selling bonds. That has the effect of driving up long-term rates. One side or the other had to cave. With this move, the Fed has taken heed of what markets have been saying. The Fed’s move also revealed it is starting to look ahead, and considering the possible inflationary effect of the Trump administration’s proposed policies. This pivot will have a profound impact on Canada. It occurs at a delicate point. Outside of the U.S., the recovery of the world’s major economies is going slowly. Moreover, the situation is unlike in 2020, when the world’s major central banks co-ordinated their policy loosening., Europe and Canada are easing, the latter quite aggressively. But the U.S., Britain and Australia are all moving toward a watch-and-see stand, and Japan has already started raising interest rates. In a world of open capital markets, where investors can move money freely around the globe at the push of a button, these policy differences can complicate the efforts of central banks to manage their own economies. If interest rates are rising elsewhere, investors can unload their domestic bonds and move their money abroad to seek better return
FINANCE FEDERAL RESERVE INTEREST RATES INFLATION CANADA GLOBAL ECONOMY
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