Bank of Canada Unexpectedly Raises Interest Rates While the Federal Reserve Pauses It’s Rate Hikes

Depending on who you talk to, stocks are either going way up or way down. Right now, the trend is on the side of the bulls. On June 15, the S&P 500 hit a fresh 52-week high of 411.95, as investors reacted to the Federal Reserve pausing its rate hike. The S&P 500 is officially up 26.3% over its October lows, meaning stocks are officially in a bull market.

On June 14, the Federal Reserve held off on what would have been an 11^th consecutive interest rate increase, holding the key lending rate unchanged in a range of 5.0% to 5.25%. While investors were hoping the pause meant the Fed may be done raising interest rates, the optimism was quashed with the Committee indicating it expects to increase rates by another half-percentage points before the end of the year. This suggests another two quarter point moves are coming, taking it to a range of 5.50% to 5.75%.

Why Did The Fed Not Raise Interest Rates?

The Federal Reserve is simply taking a break from its aggressive rate hike policy. When it comes to monetary policy, it can take months before any impact is felt.

Jerome Powell, Fed Chair commented, “We have raised our policy interest rate by five percentage points, and we’ve continued to reduce our security holdings at a brisk pace. We’ve covered a lot of ground and the full effects of our tightening have yet to be felt.”

The Federal Reserve is actually taking a similar approach to interest rates as the Bank of Canada, but with a slight twist.

Back in January, the Bank of Canada said it was pausing rate hikes, with Governor Tiff Macklem saying, “To be clear, this is a conditional pause. If we need to do more to get inflation to the two percent target, we will.”

The conditional pause didn’t last too long, though. On June 7, the Bank of Canada unexpectedly raised its key lending rate by 25 basis points to 4.75%. With the Canadian economy seemingly immune to interest rate hikes, more work needs to be done to get inflation down to the central bank’s two percent target. The Canadian inflation rate is currently 4.4%.

The Federal Reserve meanwhile has simply decided to skip this round, saying a pause gives it more information to make decisions and for the economy to adapt. Though it also admitted outright more interest rate hikes are coming. Inflation is falling, down to 4.05%, just not quickly enough.

Going forward, the Bank of Canada and Federal Reserve being in step with rate hikes isn’t a bad idea. It would most likely give the Canadian dollar tailwinds against the U.S. dollar, lower the cost of imports, and put a temporary damper on Canadian exports—all of which should help reduce Canadian inflation and the chances of any long-promised recession.

There’s still a long way to go, though.

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