US Federal Reserve holds rate, Chair Powell confirms September cut is “on the table”

Today marked yet another rate hold from the American central bank – but the implications could spell out more rate cuts for Canadians in the months to come.

The US Federal Reserve (the American counterpart to the Bank of Canada) announced today that it is maintaining its federal funds rate (FFR) at a range of 5.25 - 5.5%. This is a 23-year high for the benchmark rate, which, like Canada’s Overnight Lending Rate, sets the US cost of borrowing for variable-rate borrowing products. The rate has now sat unchanged for a full year, since July 2023.

“In support of its goals, the Committee decided to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent,” states the release issued by the Federal Open Market Committee (FOMC). “In considering any adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks.”

While this most recent rate hold was widely baked in by markets – the CME FedWatch Tool forecasted it with a 97.7% likelihood – the real takeaway from the announcement are any clues as to whether the Fed will cut rates in their next announcement, scheduled for September 17 - 18. A September cut would be the first decrease to the American cost of borrowing since the pandemic.

A September rate cut is now “on the table”

The idea that the Fed could be in a place to cut initially blossomed with the June US Consumer Price Index (CPI) report, which showed headline inflation had slowed to 3%.  That indicates clear progress since the measure hit a peak of 9.1% in June 2022, a high not seen since 1981.

And a cut is now a distinct possibility. In a press conference following his post-announcement speech, Fed Chair Jerome Powell confirmed that a September cut could be “on the table,” as long as inflation and labour data continue to trend as hoped.

While Powell was careful to clarify that the FOMC has “made no decisions about future meetings,” including September, he clarified the broad consensus is that the economy is moving closer to ideal targets. He emphasized that the Fed will remain “data dependent,” but that the inflation progress seen so far this is of “higher quality” than last year’s, which was largely based on lower goods prices.

“If we were to see, for example, inflation moving down quickly or more or less in line with expectations, and growth remains reasonably strong and the labour market remains consistent with current conditions, I think a rate cut could be on the table at the September meeting,” he said. “If inflation proves stickier and there are disappointing readings, we would weigh that.

“I think it’s just a question of seeing more good data.”

Following Powell’s speech, CME’s tool indicated an 85.6% chance (as of publish time) that a September cut is in store.

How will this affect Canadian borrowers?

Traditionally, the American and Canadian central banks move very closely in terms of their monetary policy (the act of cutting, holding, or hiking benchmark interest rates.) This is largely due to the fact that our economies are very closely intertwined, and face similar headwinds.

The US has been fighting a similar inflation battle as Canada, in efforts to pull CPI growth back down to a year-over-year pace of 2%, but has experienced more resistance; the American economy continues to post a strong showing, growing 2.8% in the second quarter of this year, following 1.4% growth in Q1, and 2.3% for all of 2023. That’s derailed early-year expectations that the Fed would cut multiple times this year. 

In contrast, Canada has already made two interest-rate cuts (on July 24 and June 5), as inflation here has shown greater improvement, hitting 2.7% in June.

While the Bank of Canada can stray somewhat from the Fed’s path, cutting too far while the Americans are holding status quo could put downward pressure on the Loonie, and actually be inflationary – the exact opposite of what the Bank of Canada wants to see. That the Fed is now seemingly on track to cut gives our central bank more reassurance that it can continue to cut rates without risks to our currency, or further sparking inflation.

The next Federal Reserve rate announcement will be on September 17 - 18. The next Bank of Canada announcement is scheduled for September 4.

Also read:

• Canadian GDP grows by 0.2% in May, BoC still on track to cut rates
• Bank of Canada cuts target interest rate by 0.25% in July 2024 announcement
• Canadian CPI lowers to 2.7% in June