By Gordon Isfeld

OTTAWA – After a short respite from monetary movements, more could soon be on the way. And at least one of them might be “a biggie.”

Both the Bank of Canada and the U.S. Federal Reserve will meet in the coming days and weeks to deal with some unfinished business. For Governor Stephen Poloz and his monetary team, the issue is whether the Canadian economy can embrace another rate hike after the July ice-breaker – the first increase in seven years.

Fed chair Janet Yellen and her policy board, meanwhile, have dual concerns about stalled plans to gradually raise lending levels and unwinding the nearly 10-year quantitative easing (QE) program that saw the U.S. central bank buy $4.5 trillion in bonds and other financial instruments to reduce interest rates in a bid to pump up private investment and spending.

As proven by last week’s data, both the Canadian and U.S. economies are now far removed from where they stood in 2008 in the midst of a global financial crisis and the Great Recession. But monetary policy remains a work in progress for both countries – and timing is crucial for any stimulus withdrawal.

The Fed’s Sept. 19-20 gathering appears to have increased in importance, given the growing anticipation for the pull-back on QE.

“The meeting in September is a biggie,” said Douglas Porter, chief economist at BMO Capital Markets in Toronto. Yellen and the other Fed policy members “are expected to announce the first steps toward undoing QE at that one – and commencing in October – presuming there is no (U.S.) debt ceiling, government shutdown fiasco.”

So far, the U.S. economy appears to be co-operating with that plan. Even so, there are two more opportunities for the Fed to make a move on this year’s calendar – during their Oct. 31-Nov.1 or Dec. 12-13 policy sessions.

Last Wednesday, U.S. GDP growth estimate for the second-quarter was revised to three per cent – on an annualized basis – up from the previous forecast of 2.6 per cent. The outlook for consumer spending and non-residential investments were also raised, while the impact of Hurricane Harvey could limit third-quarter growth that had been previously forecast at around 2.4 per cent.

“On a yearly basis, (U.S.) growth of 2.2 per cent is in line with the post-recession norm and – importantly – still above potential, implying further downward pressure on the jobless rate,” BMO said in an economic outlook.

“This should weigh toward the Fed normalizing both the balance sheet and rates this year, regardless of how well behaved wages and inflation currently are.”

The Fed has been attempting to nudge its key lending level higher since December 2015, following a seven-year lull – first going from a near-zero rate to a range of 0.25 to 0.5 per cent and setting a course for additional hikes as the economy – jobs and consumer prices most importantly – strengthens.

Much like the delayed QE tapering process, the often uneven U.S. economic performance has limited those rate rises to four, with borrowing costs now standing at one-to-1.25 per cent after the last quarter-point rise on June 14 this year.

Meanwhile, watch for another possible “biggie” move closer to home.

“There definitely is a real chance the Bank of Canada could hike rates again (at its Wednesday meeting). In fact, market pricing gives it almost a 40-per-cent chance,” said BMO’s Porter.

“We may be grappling with a U.S. government shutdown, a debt ceiling issue and even uncertainty over NAFTA talks, all of which would suggest central banks should stand aside for the moment,” he added.

“(But) having said that, I think the powerhouse rise in (Canadian second-quarter) GDP strengthens the argument that the BoC did the right thing with the rate hike in July, and that more are eventually coming – likely starting in October.”

Those Q2 economic numbers showed a gain of 4.5 per cent, beating April-to-June private forecasts of 3.7 per cent and coming after 3.7 per cent growth in the first quarter of 2017. June was also impressive on its own, adding 0.3 per cent to GDP and beating predictions of 0.1 per cent growth.

But Emanuella Enenajor, portfolio manager at investment group BlackRock in New York, cautioned that another rate hike might not be necessary.

“Canada’s economic growth is strong and the economy has a lot of room to run with inflation and wages subdued. So, I don’t think the Bank of Canada needs to step on the brakes by hiking rates aggressively,” Enenajor said.

“Also, given how high household leverage is, a handful of rate hikes can go a long way to cool the housing sector.”

While Wednesday’s rate decision will not be accompanied by a Monetary Policy Report – the quarterly publications that provide domestic and global forecasts and analysis, followed by news conference by Poloz and his senior deputy Carolyn Wilkins – the central bank has been known to jump in between MPR releases when a rate adjustment is deemed necessary.

“Nothing seems for sure any more when it comes to the bank,” said Craig Wright, chief economist at RBC Economics Research in Toronto.

“(But) I think they will opt to hold rates steady at the September meeting and then hike in October. I am a big fan of gradualism as knowing where the economy is heading is not an exact science and if a mistake is made it is easier to unwind small steps than large ones,” Wright said.

“The risk of two back-to-back moves is that markets will quickly price in a series of hikes which may push rates higher and the currency stronger than desired. As well, taking a pause at this meeting buys them time to see what the Fed does in September and how the market reacts.”

Special to Financial Post