The Federal Reserve is the Central Bank of the United States. Like the Bank of Canada, the Federal Reserve, known as the Fed, manages the U.S. dollar by determining interest rates, and controlling the money supply (regulating the amount of money printed or injected into the system). The Fed also has significant regulatory powers – having a great deal of power in inspecting and administering American commercial and investment banks. It plays a significant role in determining capital reserve requirements (how much money banks keep on hand), and keeps an eye on banks to ensure their activities do not harm the U.S. and international financial system; largely to prevent a repeat of the 2007-8 crisis.
The Fed is the most powerful central bank on the planet by far, and plays a massive role in influencing the global economy and broad economic and financial trends. For the last decade, it led the way and began the international trend of lowering interest rates, printing money to inject liquidity into the international financial system, and loaned commercial and other Central banks trillions of dollars to keep them stable, functioning, and healthy. This Wednesday, Federal Reserve Chairwoman Janet Yellen announced that the Fed would no longer continue its policy of quantitative easing (money printing and asset buying) to support the credit and financial markets. It also sent strong signals that its decade long policy of low interest rates, easy money, and loose credit is fully and totally ending.
The Fed will likely raise rates one more time before the end of the year. The effects of these announcements are very important for Canada and the southern Ontario real estate market. The Bank of Canada almost always mimics the Fed’s actions and follows in its footsteps, as do other Central Banks because of the weight of the U.S. dollar and the size of the U.S. economy. The Bank of Canada has already bucked the Fed and is raising rates faster than the Fed. But the announcement that the Fed will no longer continue its loose policies will only encourage and reinforce the emerging trend by Bank of Canada (BOC) Governor Stephen Poloz in making money more expensive and in increasing interest rates.
A recent report by the Bank of International Settlements in Switzerland (BIS), the “central bank of central banks”, indicates that some members of the BIS believe that higher interest rates will now become the new norm and that the firm orthodoxy of easy money is now truly and completely, a thing of the past. The great international financial institutions of the world are moving to make money more expensive, and in the long term this will mean higher and higher mortgage rates, and less flexibility for our already Conservative banks to approve new mortgages.