Last week the Bank of Canada (BoC) reduced the policy rate by 25 basis points (bps), but today the US Federal Reserve (Fed) didn’t follow suit. Today, the Fed once again maintained the target range for the federal funds rate at 5.25%-5.5%.

 

In the Federal Open Market Committee (FOMC) statement, the Fed acknowledged that economic activity continues to expand at a solid pace—which is good news. It also confirmed inflation eased over the last year and progress is being made to bring it down to the target rate of 2% (also good news). However, it still remains elevated.

 

CIBC Capital Markets says actions speak louder than words. But with no actions today, the Fed used some dovish words to prevent market interest rates from climbing. A rate cut is expected and fully priced-in for September with more cuts expected by the end of the year. CIBC Capital Markets confirms the most important update to the FOMC statement today is that it’s now monitoring risks to both inflation and employment, rather than only inflation risks.

 

Why isn’t the US cutting rates yet?

Michael Keaveney, Vice President, Managed Solutions, CIBC Asset Management says today’s Fed rate announcement was widely expected. “Most observers are looking past today’s decision and into the accompanying comments for signals as to whether a rate cut is coming in September—which is likely. To date, the US economy has been more resilient than Canada’s. This has given the Fed more reason to wait on rate cuts.”

 

How is the rate decision affecting markets?

Mr. Keaveney confirms “US government bond prices rose today across maturities, and the US 10-year government bond yield declined to 4.10% in the moments after the rate announcement and into the press conference. The US equity market rallied today and was among the leaders in global equity markets—driven by Information Technology stocks. Interest rate sensitive sectors such as utilities, real estate and financials were also increased today, but lagged other sectors.”

 

As we move into the fall and the US elections, it’s important to remain focused on your long-term investment goals and accept short-term market volatility as a natural part of the market cycle.

 

At CIBC Private Wealth, we take a comprehensive approach to managing, building and protecting your wealth. If you'd like to discuss this market and economic update in more detail or have questions about your investments, please get in touch with me anytime.