Fed rate-hike plans send stocks down
Major North American indices fell after the U.S. Federal Reserve said it will raise interest rates this year more times than initially expected.
The Toronto Stock Exchange’s S&P/TSX composite index fell 23.16 points to 16,265.82. In New York, the Dow Jones industrial average shed 119.53 points to 25,201.20. The S&P 500 index retreated by 11.22 points to 2,775.63 and the Nasdaq composite index lost 8.09 points to 7,695.70.
The fall came after the Federal Reserve issued a statement saying it was raising its benchmark interest rate 25 basis points to two per cent — the second rate hike this year. The Fed also announced it would raise rates another two times this year, bringing the 2018 total to four when many investors expected three.
“There’s going to be a lot more pressure on the Canadians right now if we’re seeing four rate hikes from the States to do at least one ... if not two this year,” said Michael Currie, vice-president and advisor at TD Wealth.
The Bank of Canada is expected to raise rates in July, said Currie, but now the likelihood that it will do so again before the end of 2018 has gone up. The Bank of Canada will have three more interest rate announcements after July 11.
Foreign investors look for the best rates in stable countries for their money, he said, and often choose between Canada and the U.S. People moving their money out of Canada into the States, he said, pushes down the loonie.
“The best way to defend the dollar is to keep raising rates.”
The Canadian dollar averaged 76.99 cents US, up 0.09 of a US cent.
The action means consumers and businesses will face higher loan rates over time. It was the Fed’s seventh rate increase since it began tightening credit in 2015, and it followed an increase in March this year.
When the Fed last met in May, it left its short-term rate unchanged. But it noted that inflation was edging near its two per cent target after years of remaining undesirably low. Should inflation eventually pick up, the Fed might move to tighten credit more aggressively.
A gradual rise in inflation is coinciding with newfound economic strength. After years in which the economy expanded at roughly a tepid two per cent annually, growth could top three per cent this year. Consumer and business spending is powering the economy, in part a result of the tax cut U.S. President Donald Trump pushed through Congress late last year.
With employers hiring at a solid pace month after month, unemployment has reached 3.8 per cent. Not since 1969 has the jobless rate been lower.
Beginning in 2008 in the midst of the financial crisis, the Fed kept its key rate unchanged at a record low near zero for seven years. It then raised rates once in 2015, once in 2016, three times in 2017 and now twice this year.
The Fed aims to achieve its mandates of maximizing employment and stabilizing prices by lowering rates to spur growth during times of economic weakness and raising rates to slow growth if the economy threatens to overheat. When the Fed tightens credit, it aims to do so without derailing the economy. But if it miscalculates and overdoes the credit tightening, it can trigger a recession.
The Fed’s meeting is being followed by policy meetings of two other major central banks — the European Central Bank today and the Bank of Japan on Friday.
Meanwhile, the July crude contract gained 28 cents to US$66.64 per barrel and the July natural gas contract advanced about two cents to US$2.96 per mmBTU.
The August gold contract rose US$1.90 to US$1,301.30 an ounce and the July copper contract moved up about a penny to US$3.25 a pound.