Every week at the Current we bring you the biggest business stories. This week: the Fed hold rates and the markets react, could there be a market bubble, Canada goes green, TTP could hurt the auto industry and cuban american relations
The US Federal Reserve elected to hold interest rates at near zero. Chairwoman Yellen’s decision means that rates have been frozen since December of 2008 when interest rates were dropped in a bid to jumpstart the US economy. Since then unemployment dropped to 5.1% in August and 2.9 million jobs have been created within the last year, GDP has also grown by a healthy margin. These positive economic indicators had encouraged speculation that the Fed would raise rates. But US inflation is still below 2% and while jobs have been created, wages remain low. Recent developments in the global economy have also influenced the Feds decision. Slowing growth in China, continuing uncertainty in the eurozone, struggling developing economies like Brazil and even Canada’s recession may threaten the US economy. Despite these concerns, the Fed may still raise rates before the New Year, depending on developments in the American and global economy.
Yellen at the markets
Yellen’s announcement was felt by the markets and in foreign exchange. The dollar index (which compares the value of the US dollar relative to other global currencies) fell by 1.09% following the announcement. Higher interest rates typically strengthen a currency’s value. Major stock markets in Europe and the US also took slight hits as the Feds decision may be seen as a lack of confidence in the global economy.
Burst the bubble?
Continuing low interest rates have also added to fears that a stock market bubble could burst. Low rates mean poor returns from savings and more incentive to invest in the stock market. Similarly, low rates also mean cheap loans for speculators to leverage their investments. A rates rise could encourage investors to pull their money out of the market and put it in safer savings accounts. The end of cheap money could also reduce speculation and the amount of cash invested in the market. Whether or not there is a stock market bubble is a contentious topic, but regardless any move the Fed makes will have a big impact on the market.
Canada’s inflation rate stagnated in August at just 1.3% thanks to the continuation of low energy prices. Consumers may benefit from lower fuel and hydro bills. Prices at the pump are 12.6% lower this August than a year prior. The core inflation rate which excludes energy prices fell from 2.4% to 2.1% from July to August. Inflation is unlikely to factor strongly in future Bank of Canada’s rate decisions unless economic performance fails to meet expectations.
Green with envy
Investment in clean energy rose 88% in 2014 to $11billion in Canada. $4.5 billion of that total was invested in Ontario alone with $3.9 billion in Quebec and $1.34 billion in BC. Alberta spent just $930 million – on wind investment. Canada is now the world’s 4th biggest producer of green energy in the world – a position that has left other countries green with envy – with a capacity of 89 Gigawatts. Green energy is a growing sector and also a highly contentious topic in the upcoming election.
In Thursday’s leaders debate Prime Minister Harper acknowledged that the auto industry may suffer as a result of the Trans Pacific Partnership (TTP). The auto industry has already suffered as of late with cutbacks by some major automakers including GM in Oshawa. The TTP would allow Japanese automakers to more easily sell cars in North America. Currently regulations stipulate that a certain percentage of parts must be manufactured within Canada but TTP could lax these restrictions. Harper and supporters of TTP insist that the TTP’s benefits outweigh the potential downsides. Access to rapidly growing Asian markets could prove to be a boon to the Canadian economy. Critics remain skeptical in both the US and Canada but President Obama has insisted that the TTP will likely be finalised this year.
We thaw it coming
Normalising relations between the US and Cuba has taken another step forward. Restrictions on business and travel will be eased by the US. American citizens will have more opportunities to visit the island and businesses will be able to open locations in Cuba. After 53 years of hostility Cuba is on the path to opening up to America. The thaw in relations will likely continue despite limited opposition to the agreement in the US.
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