How do the Fed's decisions affect Canada?
How the U.S. central bank is connected to a neighboring country.
Recently, the U.S. Federal Reserve, which also serves as the country's central bank, announced an indefinite rate fixing. The current rate is 5.1%. It has been raised 10 times recently. Why is this news all over the Canadian media and how are the Fed and the Canadian economy related?
The U.S. and Canada have a close economic relationship. The U.S. is Canada's main importer and one of its most important investors. In addition, Canadian citizens have the right to obtain credit from U.S. banks, which is actively used. Accordingly, because of the Fed's rate hike, Canadians are expecting a number of consequences.
First, it could lead to capital outflows from Canada. The higher the Fed's rate, the more profitable it is for investors to invest in the U.S.: they can expect higher returns. Assets from Canada are easy to transfer to neighboring America, so it can leave its little sister without investors.
Secondly, a high Fed rate will strengthen the USD and weaken the CAD, which will affect the exchange rate. On the one hand, goods from the U.S. will now cost Canadians more. On the other hand, it will be more profitable for the U.S. to buy Canadian goods, which will be good for the export sectors of the economy. It is to Canada's advantage that its products are in demand in neighboring countries.
Third, high Fed rates will raise the cost of credit and increase the debt burden on Canadian citizens and local companies. Many of them have loans from U.S. banks, so the recent Fed decision is not to their liking.
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