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Bank of Canada Governor Tiff Macklem takes part in a news conference, after cutting key interest rate, in Ottawa, Ontario, Canada July 24, 2024.
The Bank of Canada cuts interest rates again. Will the Fed follow?
After becoming the first central bank in the G7 to cut interest rates back in June, the Bank of Canada lowered rates again on Wednesday, by 25 basis points to 4.5% — and suggested there may be more cuts to come.
In its decision, the bank noted that global growth is expected to proceed at around 3% and that inflation is expected to cool gradually. It also noted that in the US, where the economy has remained hot despite inflation, “the anticipated economic slowdown is materializing, with consumption growth moderating.” That’s sending US inflation — which hit its lowest point in 12 months in June — down as well.
According to a recent Reuters poll of economists, experts still expect two rate cuts — the current rate is 5.5% — by the Federal Reserve this year, with the first not coming before September. Those polled expect the Fed to leave rates unchanged at their meeting this month. But Fed officials have signaled that a rate cut is getting “closer.”
On Thursday, the Bureau of Labor Statistics reported that US GDP grew by 2.8% in the second quarter this year driven by, among other things, higher consumer spending while inflation sits at around 3% — data which bolsters expectations that the Fed will wait until September for a rate cut.
Federal Reserve Chair Jerome Powell testifies to the Senate Banking Committee in Washington, DC.
Central bankers forecast clouds, with a chance of rate cuts
The millions of homeowners who have seen their mortgage payments double in recent years would no doubt concur with Mark Twain in his assessment of bankers – as the type of people who lend you an umbrella when the sun is shining and want it back as soon as it starts to rain.
Hopes for a break in the monetary policy clouds were frustrated this week as two North American central bankers said that interest rate cuts remain some way off.
Tiff Macklem, governor of the Bank of Canada, said yesterday that the bank’s governing council decided that rates will stay at 5%, at least until it meets again in April, as inflation of close to 3% means underlying pressures persist.
“We need to give higher interest rates more time to do their work,” he said.
The same day, Jerome Powell, chair of the Federal Reserve, told members of the House Financial Services Committee that the Fed is on a “good path” to achieving the desired “soft landing” of a growing economy with inflation back to its 2% target but that further progress is not assured.
The notes of caution come despite both US and Canadian economies avoiding recession. The US economy grew at an annualized rate of 3.2% last quarter. Even Canada’s anemic 1% growth rate suggests monetary policy is working to relieve price pressures, without choking demand.
Macklem said he is confident rates are high enough and that the discussion has now shifted to whether they need to stay at their current level.
Both central bankers characterized future progress as gradual and uneven, as wage growth remains in the 4-5% range.
But the unspoken pressure is political. A Liberal government in Canada will hand down a federal budget on April 16, less than a week after the next governing council decision. The budget date all but rules out the central bank's April meeting as a possibility for a rate cut, given the prospect of inflationary federal government spending.
In the US, it is an election year, which puts inevitable pressure on the Fed from politicians who will have to face angry voters. Powell said he acknowledged the risks of waiting too long to ease monetary policy and the damage that might cause the economy. But he said he did not want to ease credit conditions too soon and see inflation re-accelerate.
Investors expect an initial rate cut in June. Fed officials last year projected three quarter-point cuts this year, but Powell said the Fed would like to see more data to increase confidence that inflation is moving down to 2% before reducing the policy rate.
The benchmark rate has been held in the 5.25-5.5% rate since July.
For cash-strapped homeowners and consumers, the post-inflation rainbow can’t come quickly enough.
Governor of the Bank of Canada Tiff Macklem walks outside the Bank of Canada building in Ottawa, Ontario.
Know when to hold ‘em
As always, the bank said it may raise rates in the future if inflation picks up. But experts are warning that with mortgage renewals coming due for 74% of Canadian homeowners – roughly three million people – over the next year and a half, there will be a significant risk of default. Plus, the risk of a recession still looms. That may push the bank to consider a cut sooner rather than later. In September, Prime Minister Justin Trudeau predicted rates would fall by mid-2024.
Economists in the United States are thinking roughly along the same lines as Trudeau – though they’re a bit less optimistic. As the Financial Times reports, its FT-Booth survey expects the Fed will hold rates at a two-decade high until “at least” July, possibly later. The US economy has remained strong, with GDP growth hitting an annualized 5.2% in the last quarter.
Observers are watching for signs of a recession on both sides of the border while households stretch to meet monthly bills, rent, and mortgages. The Bank of Canada and the Fed will continue to walk a fine line between taming inflation and sending households over the financial cliff.