Economy

The end of QE is nigh

But that's OK for Canada

As the U.S. Federal Reserve inches closer to its next Federal Open Market Committee (FOMC) meeting on September 17th, economists are weighing in on when the tapering of quantitative easing will really begin, and what impact it will have on Canada.

And the consensus so far? This may not hurt as much as one might expect.

Paul Ferley, assistant chief economist with RBC, points out that the Fed will only opt to implement tapering when there’s enough evidence that the U.S. economy is sufficiently back on its feet. The ultimate goal of tapering the Fed’s stimulus is to put “downward pressure” on the U.S. unemployment rate, and the Reserve wouldn’t want to ease off on its bond-buying program until data shows that the desired outcome could be accomplished.

When done properly (and at the right time), the tapering is expected to strengthen the U.S. economy, which will ultimately, of course, be a good thing for Canada, he said.

Jimmy Jean, senior economist with Desjardins Economics, also doesn’t expect tapering will have much of an initial impact on Canada, since the market has a way of pricing itself for events expected on the horizon.

“It’s something that we can envision over the next couple months at most, so the markets have this way of reacting in advance and anticipating,” said Jean in a phone interview.

“It would disrupt the market if they [started tapering] really aggressively, but they don’t really have arguments to do that at this point. So they’re likely to proceed very gradually.”

Deputy Governor of the Bank of Canada John Murray expressed a similar sentiment in a short speech in Kingston this past Monday.

Fed easing will likely put downward pressure on Canada’s currency, said Murray, but “strong external demand” and “support for commodity prices” will help provide an economic lift, and ultimately act as a positive for the Canadian economy.

“The environment in which tapering will occur is likely going to be one in which U.S. growth is starting to pick up,” added Ferley. “And that will have a more dominant impact on the Canadian economy—and a more positive one at that.”

The big question that remains for most economists is when the tapering will actually get underway (as Erica Alini discussed recently). Jean and Desjardins expect there will be an announcement in September, with action on the part of the Fed starting to get underway in October.

But in a global forecast update released Thursday, Scotiabank economists predicted that tapering could be delayed until the December 17-18th FOMC meeting, stating that a number of short-term economic “disruptions,” including higher crude oil prices in the wake of an escalating conflict in Syria “could prompt the Fed to delay its plan.”

Ferley and RBC are taking a wait-and-see approach—they’ve speculated that tapering will occur sometime in the fall, “but it is very much data dependent,” Ferley said.

“There has to be enough momentum in the economy” before tapering begins, he added.

“I’m not quite sure we’ve got enough evidence yet.”