From our Portfolio Advisory Group (as of Sept 20, 2024)
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.
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.
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.
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.
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.
Wealth Management
We have a video podcast out with Dr. Joe Coughlin on our longevity series around the opportunities and realities of living longer.
Video: Changing the narrative on aging and longevity - RBC Wealth Management
I have attached a 2-page article on reallocating your wealth through insurance. Retirees can have income from pensions, CPP, OAS, RIF income – all of these are fully taxable; and income can come from non-registered account through capital gains, dividends, interest where interest and dividends are taxed in the year in which they are earning; Tax exempt life insurance allows for tax deferred growth, potentially tax free income and tax fee benefit upon death and avoids probate if beneficiaries are named. Life insurance is becoming a greater want with the higher tax rates recently announced in the latest federal budget. Please reach out to me to discuss.
Latest Scam Alerts – have a look at this link on RBC’s site on how to stay informed on the latest cyber scams
Client events
We hosted a client market update in September with guest speaker Jim Allworth. Jim and had over 250 clients out. Jim had some interesting takeaways – market breadth is good which is a positive indicator, population growth is slowing around the world and by the end of the century Lagos will have a bigger population than Shanghai. We need population growth and Canada is fortunate to have immigration which isn’t so popular in Europe currently. Jim referenced the article I have attached here called No Free Rein on the upcoming U.S. election. The gist of this message is to not allow the election coverage or outcome to get in the way of sound money management.
In the Community
Our office participated in the RBC Race for the Kids and we raised $2790. Overall this year’s race raised $2.3M. Thank you to those who donated. This race has raised over $23M since it’s inception in 2013. Please see attached photo. Currently our office is donating food item for Simcoe Hall Settlement House for their Thanksgiving food drive.
Attachments
*Global Insight – No Free Rein in the Realities of the U.S. Presidential Power.
*Economic impact of non-economic policies
Please Note - our office and the TSX and the U.S. markets are closed on Monday October 14 for Thanksgiving.