Six things about the Fed, QE and its influence on Canada
A pedestrian holding an umbrella walks past the Bank of Canada building during a snow fall in Ottawa January 17, 2012. REUTERS/Chris Wattie (CANADA – Tags: BUSINESS ENVIRONMENT)
Bank of Canada Deputy Governor John Murray gave a speech Tuesday, the gist of which was that Canada has benefitted in the past five years from a world awash in easy money. But we’ll have it even better, he says, when countries — namely the U.S — start to turn off the taps.
The speech to the Canadian Association for Business Economics put a good-news spin on the panic that has swept through global markets since May when Federal Reserve Chairman Ben Bernanke suggested the U.S. might start to cut back on the $85-billion monthly bond-buying spree known as quantitative easing some time this year.
The reaction, dubbed the “taper tantrum,” sent U.S. stocks and bond yields soaring and boosted mortgage rates. It’s been felt here in Canada too, through rising mortgage rates and a lower dollar. But the effect has been most pronounced in such emerging markets as Brazil, India and Indonesia, which have seen their currencies fall dramatically as investors pull out their cash. Last week, Brazil announced a $60-billion intervention to prop up its currency, the real. It has prompted warnings, including this one from International Monetary Fund head Christine Lagarde that the U.S. and other advanced economies should hold off on plans to tighten their monetary belts.
Not to worry, Murray says, it will all end well, particularly for Canada and for any country that has managed to keep its fiscal house in order during the era of unconventional monetary policy.
The end of quantitative easing in the U.S. and the eventual end to low interest rates here in Canada, he says, “should be viewed positively, as a sign that the global economy is well on the way to recovery and that it is time for interest rates to begin normalizing.”
Here are some highlights from his speech:
Let’s hope he’s right.