Movements in the U.S. Federal Policy will impact fixed term interest rate products and the CAD/USD exchange rate, which, in turn, impact Canadian ag. How much movement will occur in 2016 is open to interpretation though: The decision to raise rates is based on numerous things that could change before the end of 2016. Craig Klemmer and Leigh Anderson weigh in on what they see as the likely movements in U.S. interest rates in 2016.
U.S. interests rates will rise at least once
The U.S. Federal Reserve raised interest rates for the first time in nearly a decade in December 2015. Although the Fed initially remained cautious despite the U.S. economic recovery from the financial crisis, the gains in employment and inflation indicators suggest a rate hike is soon needed.
3 reasons why
1. U.S. has added 200,000 jobs a month since 2011
Following the recent financial crisis, the U.S. economy suffered job losses for nearly 25 consecutive months ending in February 2010. It took until May 2014 to regain the nearly 8.7 million jobs lost, with approximately 200,000 jobs per month added since January 2011. Job growth slowed down in recent months, but a strong trend could resume soon.
2. Approaching full employment
U.S. unemployment remains low. While the Fed doesn’t have an official goal for maximum employment, the current rate is close to the Committee’s estimated long-run median normal rate of 4.8% unemployment.
With 13 million jobs added in the last five years, the U.S. is approaching full employment. Any additional jobs will put upward pressure on wages as there’s more competition for workers. Upward pressure on wages will lead to increased consumer spending and increased inflation later in 2016.
3. Core inflation is above the 2% target range
U.S. core inflation has been below the 2% target, but is currently increasing. The 2016 rate is above 2015 levels. In fact, recent economic data has boosted Fed confidence, with inflation currently at 2.1% and expected to remain above 2% in 2016.
The U.S. economy, poised to continue growing for the remainder of 2016, would be able to absorb higher interest rates. Monitoring the movements of U.S. interest rates allows you to understand economic trends that impact Canadian ag.