Will the Fed follow the same path as the Bank of Canada at tomorrow’s meeting by tapering asset purchases on the path to recovery?
With a few exceptions such as the Reserve Bank of Australia, developed countries’ central banks meet every six weeks to assess the strength or weakness of their economies. Based on the economic data at hand, they decide whether to keep monetary policy unchanged or to raise or lower interest rates. It’s all about economic strength or weakness, and nothing else, since inflation targets can only be hit on the back of a strong economy.
The Bank of Canada took the market by surprise last week by announcing the tapering of its asset purchases at a faster pace than the market expected. It also signaled that it is ready to raise the rate in the next eighteen months, therefore the stronger economic recovery does not warrant an easy monetary policy.
The Canadian Economy Lags Behind the USA
Currency market traders and investors have a macro perspective. The Bank of Canada’s announcement triggered a massive move higher on the Canadian dollar but also raised some concerns about the Fed’s path in the months ahead.
A close look at their economies shows that the Canadian economy lags behind the US economy. Although the employment component looks better, it is worth considering that the number is influenced by part-time workers rather than full-time workers.
If US economic growth continues to outpace the Canadian economy, it may be fair to assume that the Fed will have no choice but to follow suit by tapering asset purchases. This is unlikely to be announced at tomorrow’s meeting, but Q1 US GBP data is due the following day, and it will likely beat expectations, fueled by fiscal stimulus and the fact that 130 million Americans have now been vaccinated.
So, the question is how long it will be before the Fed announces asset purchase tapering.