US Federal Reserve cuts rate by 0.25% in November announcement
Variable interest costs continue to lower in the United States, as the US Federal Reserve – the American central bank counterpart to the Bank of Canada – opted to cut its benchmark interest rate by a quarter of a per cent.
It’s the second rate cut in a row for the Fed, which ended its four-year rate hold on September 18 with a “jumbo” half-point decrease. Combined, these two rate cuts have brought its Federal Funds Rate (FFR) down to a range of 4.5 - 4.75%.
This most recent quarter-point cut was widely anticipated by markets and analysts, as the latest US inflation report showed continued progress, with a September reading of 2.4%. That’s down from 3.1% in January, and from the 40-year peak of 9.1% recorded in June 2022. Like the Bank of Canada, the Fed has been striving to reign inflation back down to a sustainable level, after it spiked following the end of pandemic economic lockdowns.
An unclear post-election future
However, the Fed’s next steps are less certain. When the central bank first slashed its rate in September, it was thought to kick off what would be an aggressive cutting cycle. According to the projection “dot plot” report released at the time by Federal Open Market Committee (FOMC), it was forecasted that the FFR would decrease by another 50 basis points by the end of 2024, with another full percentage in cuts expected in 2025, and a final half-pointer in 2026.
That path is now less likely due to the outcome of the U.S. Federal Election, as President Elect Donald Trump’s various economic campaign promises could reheat inflation. Trump has also campaigned on the promise that he’ll erode the autonomy of the Fed, which – like the Bank of Canada – has traditionally made its monetary policy decisions without political interference.
If Fed Chair Jerome Powell is concerned about this, though, he didn’t allude to it. In his statement accompanying the rate decision, he writes that the committee will make their decisions “meeting by meeting,” and that U.S. jobs and GDP growth remain stable.
“As the economy evolves, monetary policy will adjust in order to best promote our maximum employment and price stability goals. If the economy remains strong and inflation is not sustainably moving toward 2 percent, we can dial back policy restraint more slowly,” reads Powell’s statement. “If the labor market were to weaken unexpectedly or inflation were to fall more quickly than anticipated, we can move more quickly. Policy is well positioned to deal with the risks and uncertainties that we face in pursuing both sides of our dual mandate.”
However, Desjardins Principal Economist Francis Généreux writes that the Fed needs time to process the implications of what’s to come, and may offer more insight in the months to come as to how it will affect rates.
“Of course, the Fed probably hasn’t yet factored in the economic and inflationary implications of a second Trump term,” he writes in an economic update.
“If Trump is able to pass his whole agenda, including new tax cuts, high tariffs and lower immigration, it could fuel inflation down the line. We might get a glimpse of the Fed’s thinking about this in its December projections. But until Trump makes official policy announcements, the Fed is unlikely to shift its monetary policy in any way that would show up in its projections. During today’s press conference, Powell said, ‘the election will have no effects on our policy decisions’ and ‘we don’t guess, we don’t speculate and we don’t assume’ when it comes to the consequences of future policy decisions.”
Markets are now signalling it’s unlikely we’ll see a number of cuts in 2025. According to prediction tool CME FedWatch, the probability of a January cut has dropped to 28% from the previous 41%, and 70% in October.
Rising bond yields put pressure on rates
The Fed’s efforts are also being unwound by the rising cost of fixed borrowing in the U.S., as bond yields – in particular the US 10-year Treasury note, which broadly underpins the cost of American debt – rose sharply following Trump’s victory. Yields are on the rise as investors now expect higher inflation, a growing US dollar, and a boom in “Trump trade” stocks (companies that will benefit from anticipated corporate tax cuts, tariffs, and reduced regulations under the Trump regime).
How does this impact Canadian borrowers?
As the Canadian bond market also takes its cues to American yields, this latest development has pushed our own bond yields higher, and will cause fixed mortgage rates to rise. Following the election’s outcome, the government of Canada five-year bond yield – which underpins the cost of five-year fixed mortgage rates in Canada – rose to 3.12% on November 6.
That has ticked down slightly since to the 3.08% range, but has remained above that 3% threshold since the end of October, when election nerves started to ramp up. Prior to that, promising Canadian inflation and GPD reports had pulled yields down into the upper 2% range, which had given lenders the room to discount their fixed-rate options.
On the variable-rate side, this latest Fed cut paves a certain path for the BoC to do the same in its December 11 announcement. While the BoC’s Governing Council will certainly be closely watching for any economic implications following the US election, they’ve made it clear their future rate decisions will remain data dependent as well.
The bottom line: Uncertain months ahead for borrowers
While stock markets are reacting favourably to Trump’s win, the future is less concrete for bond markets, which react with volatility to any slight economic change. Borrowers should prepare for plenty of bumps in the months ahead as it becomes clear just what economic policies will be put into place, and how they’ll impact the Canadian economy – and interest rates.
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Penelope Graham, Head of Content
Penelope has over a decade of experience covering real estate, mortgage, and personal finance topics and her commentary on the housing market is featured on both national and local media outlets.