4 ways the U.S. Federal Reserve rate hike could affect Canadians

Markets had already factored in that the U.S. Federal Reserve would raise its benchmark interest rate today, economists say. Still, the hike in the key rate could affect Canadians.

The Fed boosted the targetfor the federal funds rate a quarter-point to 0.75 per cent from 0.5 per cent the first increase in a year. (By comparison, the Bank of Canada recently announced it was holding its key rateat 0.5 per cent.)

"What the market is going to be watching is thelanguageand some of the forecasts the Fed provides," says senior BMO economist Doug Porter.

1.What's good for the U.S....

The simple reason for the hike, saysNicholas Rowe, associate professor of economics at Carleton University, is that with the U.S. economy looking stronger, and the unemployment rate coming down, the Federal Reserve believes that if rates aren't raised, higher inflationbecomes a risk.

• The case for higher interest rates in Canada
• Interest rates are about to rise south of the border and Canadians will feel it
• Central banks are conservative in a different way from Donald Trump: Don Pittis

At the very least, the rate hike is "almost a stamp of approval on the recovery" by the Federal Reserve, says Porter.

"They're suggesting that they're confident enough in the recovery and things are close enough back to normal that they have the confidence to raise interest rates," he says.

The U.S. is a huge consumer of Canadian energy and exports. "If the U.S is doing well, it bodes well for [Canada]going forward,"says Jean-Paul Lam, associate economics professor at the University of Waterloo.

2. Higher mortgage rates

The Federal Reserve interest rate affects long-term interest rates in both the U.S. and Canada, says Porter. An upswing in long-term interest rates has been one of thefactors putting upward pressure on mortgage rates in Canada, he says.

"Nothingserious, but we have started to see rates broadly movinghere forthe most part, and the factthe Fed is back hiking interestratesis a big part of that," Porter says.

Rowe agreesthat mortgage rates will risein Canada as a result of the Fed's decision.

"How much? Well, don't sweat it yet," he says.

3. Pressure on the loonie

While mortgage rate increases could take some time to materialize, the hike in the Fed rate couldhave a more immediateeffect on the Canadian dollar, says Lam.

The hikewill create more demand for the U.S. dollar and put pressure on the exchange rate, reducingthe value of the Canadian dollar, he says. This will benefit Canadian exporters, but also make imports including food more expensive, Lamsays.

"The fact that the Fed is back in the game has put a bit of downward pressure on the Canadian dollar or at least lifted the U.S. dollaragainst most currencies," Porter says.

ButYellen's words today will be more important than the announcement of the actual rate hike, Porter says.

"Ifshe's seen as being hawkish or tough on interestrates, that might lead to some softness in the Canadiandollar."

4. Savers vs. borrowers

While homeownerswith mortgages like the low interest rates, Canadian savers, many of them retirees,have been punished by the returns they can earn withGICs.

And thereality isthat theBankofCanadais highly unlikely to raise itsinterestrates, which is probablythe single most important driver for deposit rates, Porter says.

"Something governor of the Bank of Canada StephenPolozmade amply clear last week isthat the bankis inno rush to follow the Fed's lead on that front."

But if U.S. interest rates are starting to move higher in a meaningful way, then there's at least a possibility that Canadian interest rates mayfollow along, saysPorter.

"Ithinkthere is somelightat the end of the tunnel forinterestrates if you'reunhappy with very low interest rates. Ofcourse, noteveryoneis. But for savers, it does suggest there's a flicker of light."