Economists at TD Bank are anticipating more rate hikes in both the United States and Canada.

“Market chatter about the imminent end of the Fed’s tightening cycle is once again increasing in volume,” said Marc Lévesque, chief strategist, North America, FX & Fixed Income Research, TD Securities, in written commentary.

He noted that the culprit is the latest policy statement following the most recent FOMC meeting on December 13.

“While the Fed left no doubt that it is still eyeing further rate hikes, the market was mainly focused on the Fed’s decision to drop the characterization of monetary policy as accommodative in its missive,” he said. “Fixed-income markets rallied, the U.S. dollar slipped, and even equities received a boost. However, we do not see this wave of bullish sentiment as warranted – the Fed’s bias is still squarely towards tightening.”

“At this stage, the U.S. economy still looks as if it has a fair amount of momentum. The housing market may be softening up, but it’s not collapsing. The weakness in consumer spending in August, September and to a lesser extent October, was most likely temporary, with employment growth picking up again, and gasoline prices back down to levels not seen since the summer months. Indicators of business sector activity have been remarkably solid,” Lévesque noted. “Consequently, talk of an imminent end to Fed tightening is premature.”

As a base case forecast, it is looking for the Fed funds rate to top out at 4.75% – 50 basis points above the current level, with 25-basis-point hikes at each of the next two FOMC meetings in January and March. “However, if the U.S. economy fails to cool down, the Fed could easily go further – in no way does the removal of the term ‘accommodation’ preclude that,” he said.

“Similarly, we still think the Bank of Canada has some tightening moves up its sleeve,” Lévesque added. “There is no reason for us to change our view that the Bank of Canada is poised to steadily raise its overnight rate to 4.00%. The Canadian economy is holding up well, and the Bank of Canada is dealing with an economy operating close to its capacity limits.”

Still, TD predicts the Bank of Canada will not get as far as the Fed in its tightening cycle. “For one, the Bank of Canada is harping about the risks of slower global growth in 2007, which will make Mr. Dodge and company especially cautious about tightening too aggressively once the overnight rate is closer to neutral. And, presumably, once the Fed tightening cycle comes to an end, it will be because there will be some signs that the U.S. economy is starting to show a crack or two – which should also temper the Bank’s enthusiasm for higher rates,” Lévesque concluded.