Economists ponder the Fed’s next move

RBC DS Global Markets says the stage is set for a 50 basis point rate hike at the May 16 FOMC meeting, with the market having largely priced in the move already. This, despite talk that the Fed’s approach will remain gradual, thanks to an article in the Washington Post suggesting it.

Economists at CIBC World Markets are most interested in the Bank of Canada’s response to anticipated Fed hikes. They note that although our economic results are lagging those of the U.S., they are “sufficiently positive to keep the Bank leaning towards tighter policy”.

In a review of Gordon Thiessen’s tenure as central banker, CIBC’s Avery Shenfeld gives him a “B” on his career. Noting that the B student will likely continue to follow class valedictorian Alan Greenspan, “he will rightly opt to match the Fed on rate hikes, rather than step on the gas with a further sharp fall in the Canadian dollar at a time when the economy no longer needs it.”

DS believes the Bank will match a 50-bps hike at the Fed. “This is based on the belief that the recent disappointing data understates the true condition of the economy,” and that “a 50-basis-point tightening by the BoC is unlikely to derail the current expansion but would have a moderating impact on economic activity.”

BMO Nesbitt Burns economist Doug Porter agrees that weak economic data have raised serious doubts about whether the Bank should follow the Fed. Nevertheless, he concludes that ultimately such a move probably will be seen as the safe thing to do. “Overall, the Bank of Canada has an open-and-shut case for further tightening,” says Porter. “With the dollar on the defensive, the Bank may have little choice but to stretch that case into a 50-bps move if the Fed chooses that course.”

Next week, the Bank of Canada releases its semi-annual monetary policy report, which is expected to confirm a tightening stance. Other than that, there’s little economic data out next week. In the U.S., producer prices are due to be released, and they are expected to show an easing in the wake of the subsiding oil shock.