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Last week the U.S. Federal Reserve raised its policy rate by 0.25%, as expected.
The market’s reaction to the Fed’s second rate hike since last December was tempered by its accompanying statement, which reassured anxious bond-market investors that additional rate hikes would be "gradual”.
In today’s post, we’ll take a look at the highlights from the Fed’s latest statement (in italics) with my comments added, and then discuss the implications for both Canadian fixed and variable mortgage rates.
Highlights From the Fed’s Latest Policy Statement
- “The labor market has continued to strengthen” and, “job gains remained solid and the unemployment rate was little changed in recent months”. Headline unemployment remains below the Fed’s 5% target but broader measures of U.S. labour-market health that count under-employed workers and people who have given up looking for work are still above their pre-Great Recession levels. Also, average U.S. wage growth is barely keeping pace with overall inflation, and that doesn’t bode well for U.S. consumer spending, which drives about two-thirds of overall U.S. economy activity.
- “Economic activity has continued to expand at a moderate pace” as “household spending has continued to rise moderately while business fixed investment appears to have firmed somewhat”.S. GDP growth fell to 1.6% in 2016 and the recent data for early 2017 imply that first-quarter 2017 growth could come in lower still. The Fed sounds encouraged that business investment has “firmed somewhat” after noting that it had “remained soft” in its January statement, but if businesses don’t see a return on that increased investment, it won’t last. And while average U.S. household spending has “risen somewhat”, consider that average U.S. household debt rose by $226 billion in the fourth quarter of 2016, which marked its largest quarterly increase since 2013. I’m sure that U.S. policy makers would be much more reassured about the rise in household spending if it were fueled by rising incomes instead of by rising debt levels.