Ever since the infamous 2013 Taper Tantrum, we've been hearing about impending Fed rate hikes and all of their implications. It was like a giant raincloud following us month after month. Today, finally, that cloud of uncertainty passed. A few quick thoughts on the Federal Reserve's 25-basis-point rate bump:
- It was built up as a blockbuster rate meeting. Yet, yields closed the day little changed. What we saw was a case of textbook anticipation fatigue, and an announcement that couldn't have been any more anticlimactic.
- Our eager economist friends are already predicting what happens next: four more U.S. rate hikes in 2016, they say.
- Long-term Canadian rates—like the 5-year yield—may somewhat track long-term U.S. rates, but it won't happen to the same extent it usually does, not with North America's economies deviating.
- Short-term Canadian rates (e.g., prime rate) will continue to hinge on domestic inflation data, Bank of Canada-speak, oil prices, and so on. They may increasingly take separate paths from U.S. rates for the foreseeable future. (You can see this divergence already in each country's 2-year notes.)
In reality, not much has changed on this side of the border, post-Fed-decision. Core inflation is still steady and holding near the Bank of Canada's 2% target and true inflation is still well below it (says the Bank). With all this Fed "liftoff" distraction out of the way, we can get back to advising clients on what matters most, which doesn't entail sweating about future interest rates.