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Is the Fed losing patience with the word "patient"?

When the Federal Open Market Committee issues its widely watched policy statement on Wednesday, the presence or absence of that single word will – perhaps more than anything else the Fed says – signal if the U.S. central bank is finally ready to begin hiking interest rates from near-zero levels.

The FOMC's previous two statements – in December and January – used identical language to describe its outlook for rates. "Based on its current assessment, the committee judges that it can be patient in beginning to normalize the stance of monetary policy," it wrote. In both cases, it also said the timing of rate increases could be accelerated "if incoming information indicates faster progress toward the Committee's employment and inflation objectives than the Committee now expects."

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Among the key information the FOMC will consider is the increasingly rosy U.S. employment picture. In February, the economy added a better-than-expected 295,000 jobs, pushing the unemployment rate down to 5.5 per cent from 5.7 per cent and raising expectations that the FOMC is moving closer to interest rate "liftoff," even as inflation remains below its target of 2 per cent.

The U.S. economy has now added more than 200,000 private-sector jobs in each of the past 12 months, "something we have not done since 1977 and which has historically been accompanied by a Fed that is in tightening mode," RBC Capital Markets economists said in a note.

"With yet another firm payroll report in hand, we think it becomes extremely easy for the Fed to justify lifting rates in June, right after it drops 'patient' at [the March 17-18] meeting," the RBC economists said.

During the financial crisis of 2008, the central bank cut the target for the Federal Funds Rate to a range of zero to 0.25 per cent, where it has remained ever since. Even if the Fed does begin hiking in June – and not everyone is convinced it will happen that soon – the bank almost certainly won't embark on an aggressive tightening cycle lest it derail the economy. The most likely scenario, the RBC economists said, is for a quarter-point increase at every second FOMC meeting – or once a quarter – "as the FOMC has been signalling a very slow launch to the cycle for a long time."

Also on the U.S. economic calendar this week are February reports on industrial production and housing starts, to be released on Monday and Tuesday, respectively. Thursday brings reports on initial jobless claims and the Philadelphia Fed business outlook survey.

Even as markets are bracing for higher U.S. interest rates, some economists are expecting the Bank of Canada to eventually cut its overnight rate a second time.

In January, the central bank trimmed its benchmark rate by a quarter point to 0.75 per cent to mitigate the impact of plunging oil prices on the Canadian economy, but it left the rate unchanged in its March 4 interest rate announcement. Whether another cut is in the offing will likely depend on how resilient the Canadian economy is in the weeks and months ahead.

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Key Canadian economic reports this week include January readings on manufacturing shipments and retail trade, to be released Tuesday and Friday, respectively. Friday also brings the consumer price index for February.

"The consumer price index … should show a further drop in the headline inflation rate, which will fuel speculation of another rate cut from the Bank of Canada," Capital Economics said in a note.

The economic research firm estimates that the headline inflation rate fell to 0.6 per cent year-over-year in February, down from 1 per cent in January, reflecting lower energy prices. The core inflation rate – which excludes the eight most volatile items – will probably come in at about 2.1 per cent, down from 2.2 per cent in January, it said.

While the lower Canadian dollar will give the economy a boost by stimulating exports, the impact will be gradual and likely won't offset the more rapid deterioration triggered by lower energy prices and falling investment in the oil patch – weakness that could spread to other sectors, Capital Economics said.

"The slump in crude oil prices has changed the Bank of Canada's game plan and, we fear, could prove to be the trigger that bursts the housing bubble, derailing the economy in the process," it said.

"Under these circumstances, we think short-term interest rates and the Canadian dollar will remain low for a lot longer than is widely anticipated."

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