For the first time in more than a decade the U.S. Federal Reserve has cut its key interest rate. In a move that was widely expected the Fed cut the rate by 25 basis points, to a target between 2 and 2.25 percent. The last time the U.S. Federal Reserve announced a rate cut was in December 2018. But that was during the depth of the global recession, which was incidentally triggered by a U.S. housing collapse that saw millions of Americans lose their home. Unlike 2008 there is no major crisis today. But there is ample economic uncertainty.
Here’s more on why the Fed cut rates and what that means for the next Bank of Canada rate decision.
Pressure from the President
U.S. President Donald Trump has chided the Fed repeatedly for it’s reluctance to cut rates. Recently he told ABC News’s George Stephanopoulos that the economy and stock market both could be doing much better “if we had somebody different” in charge of the central bank (someone other than US. Federal Reserve Chairman Jerome Powell). Trump added, “If he (Powell) did nothing, or perhaps even loosened, [the Dow Jones Industrial Average] would be in my opinion…10,000 points higher than already a very high number.”
Such comments by a U.S. president are highly unusual.
The U.S has been attempting to renegotiation trade deals with major countries throughout the world. From ripping up the North American Free Trade agreement to slapping tariffs on goods form China and Europe, the U.S has created global trade uncertainty. In its statement today, the Fed said, “In light of the implications of global developments for the economic outlook as well as muted inflation pressures, the Committee decided to lower the target range for the federal funds rate to 2 to 2-1/4 percent.”
More cuts to come
Along with this cut, the Fed provided forward guidance suggesting one or more rate cuts may be in the cards over the next 12 months. Wall Street forecasters are pricing in at least one or two more rate cut this year by the Fed, down from three previously. Prior to today, some were predicting a 50 basis points cut this meeting or next, the implied probability of which is now zero.
Could Canada cut too?
Canada’s central bank has now held rates steady six times in a row at 1.75 percent. If the U.S. central bank was to start cutting rates dramatically there is only so much Canada could bear before they followed suit.
Market watchers this side of the border seem grateful the Fed did not take more drastic measures. In a note to journalists and investors, RBC economics said, “…The data don’t make a clear argument for any easing, so we’re at least pleased to see that the Fed didn’t make a more dramatic move.”
Today’s rate cut will nonetheless put more pressure on a Bank of Canada that’s been reluctant to move interest rates. Governor Stephen Poloz is keenly watching global inflation pressures, particularly those of our largest trading partner. This was confirmed following its latest announcement, in which the Bank of Canada stated “Escalation of trade conflicts remains the biggest downside risk to the global and Canadian outlooks.”
But that likely won’t happen soon, says Deloitte chief economist, Craig Alexander. Canada did not raise rates in lockstep with the Fed, he explained to BNN. In turn, the Bank will likely not cut rates in lockstep. The Bank has to leave room to cut rates and stimulate growth if Canada was to see a downturn. Like most economists, Alexander is expecting a rate cut by the Fed again in September.
The next U.S. Federal Reserve interest rate announcement is on September 18th.