In this interview with BNN, Ed Devlin speculated on what policy changes the Federal Reserve Board are expected to announce and what the impact might be on the Canadian economy.
Ed Devlin believed that the Fed will announce a “dovish hike”, but that the interesting part will be the Q&A afterwards and what it reveals about the Fed’s expectations for economic performance. In his opinion, the Fed needs to “thread the needle” and find a middle ground that will leave the markets feeling secure. Ed did not think a recession is imminent, expecting growth around 2%. With inflation low due to lower energy prices there will be little pressure for interest rate hikes. According to him, the Fed needs to signal that they will be watching the data carefully.
Ed continued by saying that the economies of Canada and the US are intrinsically linked, and consequently Canadians need to watch the US closely. He quoted former Bank of Canada Governor Mark Carney’s statement that there are limits to how much monetary policies in Canada and the US can diverge. According to Ed, Canadians should expect a political budget heading into the election, so fiscal stimulus is likely. However, he does not think they will be irresponsible, predicting a possible fiscal boost of .2-.5 % of GDP. In his opinion, the top issue for voters will probably be “pocketbook issues”. Policies to address increasing income inequality will be popular, though possibly not the best for economic growth. Ed then stated that PIMCO is pricing in only one rate hike in the coming year and will likely focus on taking profits on current trades. He concluded by saying that stress in the credit market is not extreme, in fact he thinks it is approaching normal levels. Economic growth was expected to slow and that there could be a recession in a year or two, so corporate bonds won’t do as well.