Canadian Exports and U.S. Monetary Policy

The Bank of Canada expects Canadian exports to be affected by lower demand for products in the U.S. market.

In part, this will be a consequence of U.S. growth expected to slow sharply in the second quarter of 2023 and stagnate until the first quarter of 2024.

Weak growth during this period is largely due to the tightening of both monetary policy and, to a lesser extent, credit conditions.

Over the projection horizon, the components of U.S. activity important to Canadian exports are expected to grow more slowly than U.S. GDP for the following reasons: U.S. consumers are expected to moderate their spending on goods more than on services.

This reflects two factors. First, the proportion of household income spent on goods, after rising early in the pandemic, is expected to decline.

Second, rising interest rates will affect consumption of goods more than consumption of services.

Canadian exports

These developments will disproportionately affect U.S. demand for Canadian products, as Canadian non-commodity exports are more goods-oriented than services-oriented.

U.S. companies are also expected to significantly reduce investment spending on capital equipment, a key driver of Canadian exports.

The U.S. Federal Reserve is in charge of U.S. monetary policy. The legislation specifies that in conducting monetary policy, the Federal Reserve System and the Federal Open Market Committee (FOMC) shall «effectively promote the objectives of maximum employment, price stability, and moderate long-term interest rates.»

The Federal Reserve adjusts the primary instruments of monetary policy (open market operations, discount rate, and interest on reserves) to influence demand and supply conditions in the federal funds market and to maintain the federal funds rate at the level targeted by the FOMC.

The FOMC sets a long-term average inflation target, rather than an annual target defined for a shorter period.

According to the OMC, in 2020, 2021 and 2022, the FOMC has confirmed its view that 2% inflation, as measured by the annual change in the price index for private consumer expenditures, is more consistent over the longer term with the Federal Reserve’s statutory mandate.

Prices

The FOMC believes that long-term inflation expectations that are firmly rooted at 2% promote price stability, moderate long-term interest rates, and enhance the FOMC’s ability to promote maximum employment in the face of significant economic shocks.

To anchor long-term inflation expectations at this level, the FOMC targets 2% average inflation over time (measured as the change in the price index of private consumer spending).