Bank of Canada sees less volatility from Fed tapering

Tue Dec 17, 2013 6:49pm EST
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By Louise Egan and Randall Palmer

(Reuters) - Market volatility spurred by the U.S. Federal Reserve's plans to scale back its massive stimulus program is far less of a concern now than it was earlier this year, Bank of Canada Governor Stephen Poloz told Reuters on Tuesday.

Investors understand the Fed's thinking much better than they did when Chairman Ben Bernanke first mentioned the possibility of tapering the U.S. central bank's $85 billion in monthly asset purchases on May 22, Poloz said.

The market's huge one-way bets on the Fed continuing its so-called quantitative easing suddenly had to reverse at that time, causing market turmoil, but Poloz argued that the impact now will be much smaller.

"The good news is that we kind of washed that out last summer. People understand it much better now, and my sense of it is that there isn't anything like that kind of stacking (leveraging) in the marketplace," Poloz, 59, said in an interview at the central bank's Ottawa headquarters.

"So I think that the volatility thing is probably not nearly as concerning as what we saw then."

In addition, the Fed's tapering will take place in the context of a strengthening U.S. economy, which should give a lift to Canada's economy, he said.

A two-day meeting of the Fed's policymaking Federal Open Market Committee, at which officials could decide to trim the monthly purchases, ends on Wednesday.

While recent strength in the U.S. labor market has raised the chance that the policymakers might start tapering as soon as this week, most economists expect the Fed to keep its stimulus program fully in place until next year.   Continued...

Bank of Canada Governor Stephen Poloz speaks during an interview with Reuters in Ottawa December 17, 2013. REUTERS/Chris Wattie