US Fed Rate Hike Sparks Concerns for Canadian Investors

The US Federal Reserve raised interest rates for the first time since 2023, bringing its target range to 3.75% to 4.00%. Canadian investors are wondering if borrowing costs will rise in Canada too.

The Bank of Canada sets monetary policy independently, but the Fed's decision can affect the Canadian dollar, bond yields, stock valuations, and companies with US exposure.

Higher US rates can strengthen the US dollar, making imported goods more expensive for Canadians. They can also push bond yields higher, giving investors an incentive to hold fixed-income investments instead of dividend stocks.

Toronto-Dominion Bank (TSX: TD) is one of Canada's big bank stocks with a large US network. It reported net income of $1.07 billion in its most recent quarter, reflecting a 41% improvement over the prior year.

TD has direct exposure to lending and deposits in the US market, making it sensitive to changes in interest rates. Higher rates can mean TD can charge borrowers more, but also reduce demand for loans as consumers feel less inclined to borrow at higher rates.