America’s central bank raised its benchmark interest rate a quarter of a percentage point on Wednesday, in line with what economists were expecting but a sign that consumers need to get ready for even higher interest costs.
The Federal Reserve, which is the U.S. equivalent of the Bank of Canada, announced that it had decided to raise its target rate by a quarter point to a range of between 0.75 per cent and one per cent.
“Monetary policy remains accommodative, thereby supporting some further strengthening in labour market conditions,” the Fed said in a statement.
That’s the central bank’s way of saying it thinks rates will still be low enough even after a small hike, so it’s unlikely to shock the U.S. job market given how strong it has been of late.
“Waiting too long to scale back [cheap lending],” Janet Yellen said at a press conference on Wednesday, “could potentially require us to raise rates too rapidly some time down the road.”
It’s the third time the U.S. central bank has decided to hike rates since 2015, and stands in sharp contrast with Canada’s central bank which has cut its rate over the same period in an attempt to stimulate the economy.
Canadian impact
The move has been telegraphed for months, as bond yields have been inching higher in anticipation of the move since last week. But while expected, the move is unwelcome news to Canadian borrowers, who are nonetheless impacted by monetary policy in the U.S.
That’s because variable-rate mortgages may be impacted by what the Bank of Canada does, but most Canadians have fixed-rate mortgages, and rates for those are based more on bond rates, which will be affected by the Fed’s move on Wednesday.
The U.S. Federal Reserve, led by Janet Yellen, has raised its benchmark interest rate once again on Wednesday, the third time it has decided to do so since 2015. (Susan Walsh/Associated Press)
“The quarter-point increase in the U.S. Federal [Reserve] interest rate typically results in the same increase for fixed-rate mortgages here in Canada, which we should expect to see in the coming weeks,” said James Laird, co-founder of rate comparison website RateHub.ca
Many of Canada’s biggest banks have already hiked mortgage rates in anticipation of this, since Donald Trump was elected president.
Based on the Fed’s projections Wednesday, as many as two more rate hikes could be coming this year, making borrowing more expensive. But the Fed was quick to stress that it continues to expect any future rate hikes to only roll out “gradually.”