The FOMC seems prepared to pause today while indicating additional tightening later this year. Recently, the leadership has signalled a preference to pause due to uncertainty about the lagged effects of rate hikes and the potential for tighter credit to increase the risk of overtightening. And given the division in the ranks, the leadership seems to view a pause as appropriate.
However, the path from here to July feels quite a bit more uncertain, although; most committee members seem to think a hike is necessary, and lessons from the BoC and RBA this year would argue that this is probably a safe conjecture.
After the pause, both central banks saw a sputtering of progress in reaching their inflation targets and were eventually pulled into additional hikes.
But it’s worth noting, though, that inflation passthrough is somewhat higher in these smaller open economies than in the US. And with shelter disinflation and a decline in used car prices expected next month, US inflation could look much better ahead of the July meeting.
The Canadian Dollar ticks all the boxes in this environment, and the Loonie should benefit from steady-state growth in the US, a supportive risk environment, a more hawkish BoC and, of course, higher oil prices if they stick.
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