The Bank of Canada today announced that it was raising its overnight lending rate by 25 basis points to 50 basis points. The doubling of the price of money is the first hike in North American by a central bank since the Great Recession ended.
The bank explained:
The economy grew by a robust 6.1 per cent in the first quarter, led by housing and consumer spending. Employment growth has resumed. Going forward, household spending is expected to decelerate to a pace more consistent with income growth. The anticipated pickup in business investment will be important for a more balanced recovery.
Will the Federal Reserve soon follow? Don’t count on it. Chicago Fed President Charles Evans downplayed the idea in a speech today. According to Bloomberg:
Evans told reporters in Seoul today that he “wouldn’t be surprised” if the Fed’s policy of keeping rates low “gets extended just a little bit.” Philadelphia Fed President Charles Plosser, who is attending the same event, said separately that “how the crisis in Europe ends up affecting the economy will dictate how we will respond.”
The Fed funds futures market seems to agree. Contracts are priced in anticipation of Fed funds remaining unchanaged at a zero-0.25% target rate through the end of the year.
Another reason for expecting rate hikes in the U.S. to come later rather than sooner comes by way of the rising greenback. AP reports:
The dollar surged to a fresh four-year high against the euro Tuesday as worries that European banks could still face large loan losses next year added to concerns about the continent’s economic outlook.
Notice that American officials are no longer making statements about how the government supports a stronger dollar. That’s because the buck is rising these days for all the wrong reasons: risk aversion. The dollar is still the world’s reserve currency, for good or ill, and the world is piling in once more in search of the proverbial safe haven. A higher dollar at the moment is a signal that the world is worried about deflation, debt and slow growth. Those risks aren’t new. The only difference is that investors are now demanding a higher risk premium (i.e., lower asset prices) as additional compensation for the potential fallout.