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FILE PHOTO: Federal Reserve Chair Jerome Powell holds a press conference following a two-day meeting of the Federal Open Market Committee on interest rate policy in Washington, U.S., September 18, 2024.
Interest rate cuts are doing their thing. Will more come soon?
Recent rate cuts by the Federal Reserve and the Bank of Canada, along with lower inflation rates in both countries, are spurring … talk of more cuts. This includes a potential “jumbo” cut this month in Canada.
A former deputy governor of Canada’s central bank is arguing for a half-point cut when the bank meets in late October, and he’s betting on it. Paul Beaudry argues that the economic stimulus would spur the Canadian economy – by boosting consumer and business spending.
Statistics Canada reports that the country’s inflation rate was 2% in August while the US Bureau of Labor Statistics pegged the rate south of the border at 2.5%.
In September, the Fed cut rates by 50 basis points, its first trim in four years. That had effects on both sides of the border, given how close the US and Canadian economies are linked. Some Canadian mortgage rates on offer ticked down after the cut, dipping below 4%. So too did their US counterparts, triggering an immediate jump in real estate hunting and refinancing.
Experts believe the Fed will embrace more cuts in the coming months, aiming for a target of 4-4.25%, with even lower rates on the docket for 2025. The Fed and Bank of Canada will drive borrowing costs down and offer some relief to consumers and borrowers as both economies continue to level out.A trader works on the trading floor at The New York Stock Exchange (NYSE) following the Federal Reserve rate announcement, in New York City, U.S., September 18, 2024.
The Fed goes big for its first rate cut since 2020
The Federal Reserve dropped interest rates by half of a percentage point on Wednesday, its first cut since 2020. The move – larger than the .25 bps that was also under consideration – is a show of confidence that inflation is moving sustainably toward 2%, and it aims to boost to the labor market. The cut will bring the benchmark federal-funds rate to a range between 4.75% and 5%.
The Fed decided that keeping rates high “was becoming restrictive and worried the labor market could turn sour quickly,” according to Robert Kahn, Eurasia Group’s managing director of macro-geoeconomics. “They didn't want to fall behind the curve and decided to get a quick start at easing.”
In the short term,anticipation of rate cuts boosted Wall Street, with the Dow Jones Industrial Average hitting a new record on Wednesday. Yields on the 10-year Treasury note stood at 3.64% on Tuesday, up slightly from a 52-week low recorded on Monday. It also bodes well for Kamala Harris’ campaign, since high interest rates had been souring voters’ views on the economy.
In the long term, the Fed “looks like they will move gradually from here,” says Kahn. “It's a quick start to a long journey.” Inflation expectations are also unlikely to be affected because “inflation has been coming down recently, so any new risks will take time to show themselves.”
Fed poised for 50 basis point rate cut
Breaking: Fed poised for 50 basis point rate cut
The Federal Reserve appears set to drop its benchmark interest rate by 50 base points today. That lending rate – which influences borrowing costs broadly – can put the economy in a chokehold when rates are high, or stimulate it when lowered.
According to Eurasia Group’s Managing Director of Global Macroeconomics Robert Kahn, “enough progress has been made on inflation to begin the process of easing financial conditions with a big first move to protect against recession.”
Lawmakers have repeatedly called on the Fed to lower rates over the past year. Still, the independent body has resisted, waiting for economic data to indicate that a soft landing – where inflation is tamed without a recession – appeared to be in sight. Inflation currently stands at 2.5%, down from its peak of 9.1% in 2022 and nearing the Fed’s 2% target.
Election effect: It takes time for monetary policy to make an impact, so any rate cut is unlikely to have a material effect on the economy before the election, but it will still have influence.
“It's possible that the cut, and the boost to markets that it could provide, gives a lift to sentiment surrounding the economy that helps the Harris campaign,” says Kahn. But, on the downside, “it will validate Donald Trump’s belief that the Fed is political and the move is being done to help his opponent.”Federal Reserve Chair Jerome Powell testifies during a U.S. House Oversight and Reform Select Subcommittee hearing on coronavirus crisis, on Capitol Hill in Washington, U.S., June 22, 2021.
25 or 50? Jobs report likely to influence magnitude of Fed’s rate cut
Background: Unemployment has risen for four months in a row and is up almost a percent from its lows last year, which, according to Eurasia Group’s global macroeconomics expert Babak Minovi, is worrying because “rises in unemployment like this usually go hand in hand with recessions, and that’s certainly not our (or the market’s) base case.”
Why it matters: Fed Chair Jerome Powell has put the labor market at the heart of the central bank’s decision on when and how quickly to ease interest rates.
“Economists are expecting unemployment to stop its losing streak in August with a modest recovery, but another surprise worsening would be a warning sign to the Federal Reserve that the US economy is slowing down faster than intended,” says Minovi, who believes that under this scenario the Fed would cut interest rates by 50 basis points from its current 5.5% target rate, as opposed to 25. But, if the unemployment rate does improve as expected? “Markets will breathe a sigh of relief — for the time being,” says Minovi.
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.
A drone view shows a flooded area in the aftermath of Hurricane Beryl, in Houston, Texas.
Hard Numbers: Doctors at a distance, US inflation falls again, Beryl barrels through insurers, Virginia bans smartphones in schools
670,000: Is there a doctor in the house? Maybe, but if you’re an Ontarian, you might have to travel. At least 670,000 residents of the province live more than 50 kilometers from their family physician, according to a new report. Meanwhile, the number of Ontarians who have no family doctor at all has risen by a third since 2020 to more than 2.5 million people.
3: Annual inflation in the US fell for the third straight month in June, coming in at 3%, down from 3.3% in May. That will give the Fed room to start cutting rates again soon, but popular perceptions of inflation persist. Polling earlier this spring showed that two-thirds of Americans consider high prices a top problem, even after months of declining inflation. Why? Because things cost significantly more than they did before the pandemic-driven price surge.
2.7 billion: Damage inflicted by Hurricane Beryl will cost US insurers at least $2.7 billion, according to initial estimates. The storm, which slammed into southeastern Texas on Monday, lashing the Houston area with heavy wind and rains, destroyed property and left millions without power. For more on how climate change is cooking US insurers, see our special report by Ian Bremmer here.
1.2 million: Virginia will limit or ban cellphone use in public schools, a move that would affect 1.2 million students. Earlier this summer, the Los Angeles city school system issued a similar ban, amid heightened attention to the ways that smartphone use by adolescents can interfere with learning and threaten mental health. In Canada, Alberta will soon join Quebec, Ontario, and British Columbia with a similar measure.
FILE PHOTO: Japanese Yen and U.S. dollar banknotes are seen in this illustration taken March 10, 2023.
How long can Japan prop up the yen?
Japan’s currency slipped to 160 yen to the dollar on Monday, its lowest rate since 1990, triggering a government intervention and threatening Prime Minister Fumio Kishida’s position.
Voters are frustrated by Japan’s high cost of living, but a change in leadership is unlikely to alleviate the pain. The heavily populated island has few fossil fuel reserves, and it must import food and energy from abroad. That means when the yen weakens, ordinary folks see their bills shoot up.
The government employed a short-term fix: selling dollar reserves and buying yen to boost it. But Eurasia Group analyst David Boling says there’s not much to be done about the root of the problem.
“The yen’s weakness is being driven by the interest rate differential between the US, which has high interest rates and high bond yields, and Japan, which is very low,” he says. “Money is moving out of Japan to capture those higher yields.”
It might be another nail in the coffin for the PM, who could be replaced at the Liberal Democratic Party’s leadership conference this September.
“Japan has to have a lower house election by October 2025, and so the members of the LDP will be thinking about electing a leader who can take them through a national contest,” says Boling.
A pile of money sitting on top of a table.
No rate cut for Biden or Trudeau
It looks like neither Joe Biden nor Justin Trudeau can count on lower interest rates to give them the economic or political boosts they need.
In the United States, hopes for a rate cut were dimmed when Wednesday’s consumer price index numbers dropped. The index was up 3.5% in March compared to last year, higher than February and higher than expected, which means the Federal Reserve is unlikely to cut rates in the US anytime soon.
The Bank of Canada, meanwhile, held its benchmark rate steady for the sixth straight time on Wednesday, but Bank of Canada Gov. Tiff Macklem offered room for hope. “We need to be sure this is not a temporary dip in inflation,” he said, noting that a rate cut in June is still possible.
Both Biden and Trudeau desperately want inflation to ease and for interest rates to drop – to ease cost-of-living concerns for voters.
On Tuesday, former Bank of Canada and Bank of England Gov. Mark Carney – notably considered a potential successor to Trudeau – said the era of steady low-interest rates may be over because of structural changes – namely greater volatility and the shift to a low-carbon economy.
This perspective will be a cold comfort to the Biden and Trudeau camps as they face the prospect of asking for votes while mortgage rates, grocery, and gas bills remain high.