In this week’s economic update, we are examining the recent interest rate cut announced by the U.S. Federal Reserve. Specifically, we are looking at the decision itself, and it’s impact on the U.S. economy and financial markets.
In the same theme, we are sharing the latest episode of the 10-Minute Take, where RBC Economists Claire Fan and Carrie Freestone are joined by Frances Donald (RBC Chief Economist) to discuss why the U.S. Fed made a 50 basis points cut to interest rates.
Lastly, we are proud to highlight our sponsorship of the 2nd Annual Shelldale Family Gateway Golf Tournament, supporting the important programs that aim to ensure all kids have opportunities to success in their life paths.
Economic Update
The U.S. Federal Reserve cut interest rates this past week, joining many other major developed central banks who have started to reduce interest rates in recent months. Another important development was the notable decline in Canada’s inflation rate, with August’s headline inflation reaching the Bank of Canada’s target of 2% for the first time since 2021. Below, we take a closer look at the Fed decision and explore how lower interest rates may impact the economy, and what they may mean for the financial market outlook.
Rate cut designed to ‘recalibrate’ approach
The Fed opted to cut interest rates by a half of one percent - larger than the quarter percent reductions seen from other central banks. Fed Chairman Jerome Powell characterized the move as one that was needed to “recalibrate” the bank’s approach given the fall in inflation and increase in unemployment over the past year. In contrast to the past few years, when the Fed felt the balance of risks was skewed more heavily towards inflation, it noted the risks between inflation and employment are now “roughly in balance”. The Fed telegraphed that additional rate cuts are likely through the remainder of the year, but Mr. Powell emphasized they are meant to preserve and extend what it regards as a reasonably healthy economy.
Lagged effect to be expected for business and consumers
Lower interest rates translate into reduced borrowing costs for businesses and consumers. As with interest rate increases, there is often a lagged effect from interest rate cuts, with the speed at which any relief is felt varying and depending on the circumstances of borrowers. On the business front, small businesses often hold floating-rate loans, which adjust quickly to lower interest rates, while larger companies often hold longer-term fixed rate debt that takes longer to reprice.
Consumers may also feel the impact to varying degrees. Credit card users should see some early benefit given the variable rate nature of credit card debt. Meanwhile, the impact to mortgages may be more mixed. For consumers looking to buy a new home, they may be encouraged by the decline in mortgage rates though they may also be tempted to wait given the Bank of Canada and U.S. Federal Reserve have telegraphed the potential for even lower rates in the months to come. Meanwhile, for Canadian homeowners that are facing mortgage renewals, the reduction in rates this year may simply reduce the headwind that some Canadian mortgage holders are facing given many will have to renew at borrowing costs that are still substantially higher than the ultra-low rates they may have locked in years ago.
Equity market reaction has been initially positive, but history suggests caution
While global equity markets have responded favourably to the initial round of interest rate cuts from central banks, history suggests some caution is warranted. There have undoubtedly been some periods of strong equity markets gains following the beginning of an easing cycle. Likewise, there have also been some notably weak periods following the first interest rate cut, typically reflecting a deteriorating economic and corporate earnings backdrop. Overall, the range of historical outcomes for equity markets has been wider than normal after the first interest rate cut.
Summary
We view the path forward with cautious optimism, acknowledging that lower interest rates will eventually lead to easier financial conditions. Nevertheless, as with hikes, the cuts will take time to provide some relief to consumers, businesses, and the economy. In the meantime, we are mindful of the lesson that history has taught us: the start of interest rate cuts can either extend the economic cycle or mark an important turning point. We will be watching closely for signs of either scenario unfolding.
What led the U.S. Fed to cut interest rates by 50 basis points?
The U.S. Federal Reserve interest rate cut was the first since the pandemic – an easing that was highly anticipated with inflation showing further signs of deceleration and a very gradual rise in unemployment. That said, many were expecting a 25 basis point cut with overall economic output remaining strong.
On the latest episode of the 10-Minute Take, RBC Economists Claire Fan and Carrie Freestone and special guest, RBC Chief Economist Frances Donald discuss the Fed’s latest interest rate decision and what this could indicate for U.S. economy.
You can find the podcast on your favourite platform, or by clicking here.
Shelldale Family Gateway – 2nd Annual Golf Tournament
Elinesky Schuett Private Wealth was proud to sponsor and participate in the 2nd Annual SFG Golf Tournament, hosted on September 18th at Ariss Valley Golf and Country Club.
All of the Child and Youth programs run by Shelldale Family Gateway rely on fundraising and donations to enable them to deliver the critical programming to their neighbourhood. Programs include Breakfast Club, Afterschool programs, Summer Camp, and so much more.
Thank you to everyone who attended, our fellow sponsors, and for all the volunteers from Shelldale who helped make the day such a great success.
As always, we are available to connect with you personally. Please don’t hesitate to contact us at 519-822-2024 or elineskyschuett@rbc.com.
