The Bank of Canada cut its policy rate 25bp to 2.50% as expected, largely attributing its decision to softer CPI data, a loosening labour market, and a more optimistic inflation outlook given PM Carney’s decision to repeal retaliatory tariffs on US goods. Rabobank analyst Michael Every forecasts another 25bp cut in October and sees the terminal rate at 2.25%. However, the risk to this view is skewed in favor of two more cuts this year over none. (Read the full report here.)
The Fed decision was also in line with expectations with a 25bp cut to 4.00 to 4.25%. Rabobank’s report can be found here. Speculation surrounded the meeting, but it only resulted in new joiner Miran calling for a 50bp move. The key takeaway from the Fed’s statement was that “the Committee is attentive to the risks to both sides of its dual mandate…downside risks to employment have risen”. Powell stated the -911K change in payrolls through to March 2025 was “almost exactly” what the Fed had expected, raising questions about their forecasting abilities.
Looking ahead, the ‘dot plot’ averages a Fed Fund rate of 3.6% by end-2025 and 3.4% by end-2026, -0.3 and -0.2 from June, respectively. However, one board member is forecasting a 2025 year-end implied rate of 2.88, suggesting potential cuts at the October and December meetings. Some speculate this may be Miran, but this remains unconfirmed. Powell mentioned that “a wide range of views is natural in the current situation.” Rabobank now forecasts another 25bp cut at the October 29 meeting, with a terminal Fed Funds rate of 3.00%.
In the press conference, Powell faced political questions, indicating a potential shift in focus. The initial dovish tone of Powell’s statement led to a dip in yields, but inflation expectations rose as the day progressed. Foreign investors in US assets sought protection against dollar swings, highlighting a broad rethink on exposure.
Geopolitically, the EU is exploring using €170bn of Russia’s frozen assets to fund Ukraine, while tensions in the Middle East and Asia escalate. The article delves into various global developments, highlighting the interconnectedness of political and economic events.
Loading recommendations…