Fed rate hike a positive sign for Canadian economy – by Brian Milner (Globe and Mail – December 17, 2015)


The U.S. Federal Reserve signalled its confidence in a resurgent U.S. economy with a historic hike in interest rates – the first since the world plunged into the worst financial and economic crisis since the Great Depression.

The world’s most powerful central bank raised its key rate Wednesday by a slim quarter of a percentage point to a range of 0.25 per cent to 0.50 per cent, and promises that it will proceed cautiously as it embarks on a transition from massive monetary stimulus toward more normal policies.

The Fed had kept its benchmark target rate at a record low near zero since late 2008, as it battled to revive the battered U.S. economy and stabilize the country’s tattered financial system.

Although modest, the long-expected increase marks an important shift in monetary policy that puts the Fed on a divergent track from other major central banks. While the Fed embarks on its first tightening cycle since 2004 to 2006, its counterparts are either loosening their own policies or treading water in the midst of a deep commodities slump, falling investment, deteriorating trade and slower economic growth across much of the world.

The Bank of Canada has cut interest rates twice this year to cope with a dramatic slowdown in the resource-producing provinces.

But the Fed’s policy reversal spells good news for Canada if the U.S. economy is indeed strengthening. That would mean a boost to Canadian exports, which would be further helped by a stronger U.S. dollar, as more foreign money pours into U.S. bonds bearing higher interest rates.

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