Both the Bank of Canada and the U.S. Federal Reserve held their policy meetings this week, leaving rates unchanged but sounding increasingly hawkish. The Bank of Canada held its target for the overnight rate at the effective lower bound of 0.25%.
In its Monetary Policy Report, Canada’s central bank announced that all emergency measures due to the pandemic have ended. In order to control inflation, the bank said it expected that interest rates will need to continue to increase. Further, the recovery continues, but in an uneven fashion, as strong demand is marred by supply chain issues.
Likewise, the Federal Open Market Committee announced it would continue to fight inflation. Comments by Fed Chair Powell were more hawkish than expected and that a rate hike would be likely in March. The Fed also indicated it would start "significantly reducing" the bond holdings on its balance sheet. At the end of the central bank’s two-day policy meeting, the pace of subsequent rate hikes and how quickly officials will reduce the massive balance sheet was left undecided.
The primary way to reduce the size of the Fed’s balance sheet will be by limiting how much of the principal from maturing bonds the Fed reinvests each month. It is likely that this would start after the first rate increase.
