The U.S. Federal Reserve kept its prime lending rate unchanged at its meeting Thursday, extending a nearly seven-year-long streak of near-zero interest rates at least until its October meeting, and more likely until December.
At a press conference following the announcement, Fed chair Janet Yellen listed off a number of reasons why the U.S.’s central bank thinks the economy is still too weak for an interest rate liftoff. And among those reasons was Canada’s economic slowdown.
Asked by a Fox Business reporter if it was the economic slowdown in China that had the Fed looking warily at the global economy, Yellen said yes — but not only China.
“We saw a very substantial downward pressure on oil prices and commodity markets and those developments have had a significant impact on many emerging market economies that are important producers of commodities, as well as more advanced countries including Canada,” Yellen said.
She described Canada as “an important trading partner of ours that has been negatively affected by declining commodity prices, declining energy prices.”
Canada fell into what economists are describing as a “technical recession” in the first half of the year, as sinking oil prices took the wind out of Canadian exports. Economists argue the recession is “technical” because job growth has held up even as economic output has shrunk.
Most traders had expected the markets to breathe a sigh of relief if the Fed held on interest rates this week, but its statements on the economy may have been too pessimistic and spooked the markets. The Dow Jones tanked some 1.5 per cent Friday, and was trading around 16,418 as of 2:30 pm ET.
By contrast, the Canadian dollar soared, and was up nearly a cent on the day in early trading, before settling back down to 75.8 cents U.S. But it’s really more a case of the U.S. dollar falling against other currencies, as traders realized U.S. interest rates aren’t rising in the short term, and there are other currencies on which you can earn higher interest.
The talk on the street is now for a rate hike from the Fed in December. Then again, we’ve been hearing predictions of a rate hike now for the better part of half a decade, so we shall see.
The Fed meets again in late October. We’ll have to wait until then to see if Yellen still sees Canada as a downside risk to the U.S. economy.