There is increasing nervousness about the end game for the Federal Reserve’s ultra-accommodative monetary policy. The speed of both interest rate rises and the unwinding of quantitative easing are closely watched topics. Yet some observers may not realise that substantial shifts have already begun because they have been obscured by “headline numbers” that remain unchanged.     Looking back, U.S. Treasury securities of all maturities held by the Federal Reserve as assets rose in three stages from about $500 billion in 2008 to $2,465 billion in 2014 where they have remained ever since. On the surface, other than a little rate tinkering, little has changed for three years. However, this ignores the evolving term structure or maturity profile of the Federal Reserve’s holdings which has been getting shorter since 2015.     During 2013 and 2014, the Fed held no U.S. Treasury securities maturing between 91 days to 1 year, none. Starting in 2015, the Fed began to acquire T-bills and other short dated Treasury securities and now holds $322 billion worth.   Given that the total of all maturities remains unchanged, this shift means that the Federal Reserve has trimmed its bond holdings in favour of adding a good and rapidly rising money market position. Now, like any investor holding cash or near-cash, the Fed has new open market flexibility.     Aside from the obvious implication that the Federal Reserve has started an orderly retreat from continuously supporting the bond market and suppressing long term interest rates which […]

What is New on the Macro Level? by Hubert Marleau of Palos Management, Montreal   Put simply, Interest Rates Differentials (IRD) between Canada and the U.S. are basically flat. Their outlook for economic growth is similar and North American inflation is destined to converge toward the 2% target. Thus, the path of monetary policy between Canada and the U.S. should be identical.    Based on these observations, the exchange value of the Canadian dollar should revert back to our calculated Canadian Purchasing Power Parity (PPPR) of 78.5 US cents. Unfortunately, the calculation is not independent of risks like the price of oil, NAFTA negotiations and the unhealthy financial conditions of Canadian households. Should the price of oil fall below its marginal cost of production, which is around $55 a barrel, the NAFTA negotiations conclude in a negative manner, or indebted households stop spending, the Loonie could become subject to a negative reversal of fortunes.    Barring these low probability outcomes, the Bank of Canada will likely be the major driver behind the future performance of the Loonie. In this connection, the odds of an October or December rate hike are low. Mr. Poloz is likely to ease up and embrace a more cautious approach. A few days ago, he said that “there is no predetermined path for interest rates from here”. It confirms the belief that from here on out, the tightening will be gradual and slow and, in turn, follow the decisions of the Federal Reserve Bank. Recent economic […]