Two interest rate decisions. The Bank of Canada cut rates by 25 basis points as the central bank prepares for potential tariffs. The US FOMC kept rates unchanged.
The Bank of Canada cut rates by 25 basis points to 3% from 3.25%.
BoC Governor Tiff Macklem highlighted the close correlation between the Canadian dollar’s depreciation and trade threats from the U.S., noting that future policy decisions will increasingly account for its impact. The threat of tariffs was a significant factor in the Bank’s prior decision to cut rates by 25 basis points, emphasizing the importance of risk management.
Macklem stressed the need to stabilize the economy before potential tariffs take effect, with a focus on supporting growth if tariffs lead to downward inflationary pressures. However, if inflation pressures rise, the Bank will prioritize guarding against persistent inflation to prevent tariff-driven price increases from broadening to wages and other prices.
He said that while quantitative easing (QE) remains unnecessary at this stage, Macklem underscored the cautious use of forward guidance as a policy tool. The BoC remains committed to balancing inflation risks and fostering economic resilience amid ongoing trade uncertainties.
ON inflation and growth:
Inflation:
- Inflation remains near 2%, with business and consumer expectations normalized and no evidence of broad-based inflationary pressures.
- Shelter price inflation is still elevated but is gradually declining.
- Temporary tax measures may cause some CPI volatility, but inflation is expected to remain close to the 2% target over the next two years.
Growth:
- Economic activity is gaining momentum as past interest rate cuts stimulate the economy.
- Lower borrowing costs are driving growth in the housing market and consumer spending on big-ticket items like cars.
- Household spending is broadening to other consumer items and is expected to strengthen further.
- Business investment has been weak but is forecasted to improve gradually.
- Export growth is supported by new capacity in the oil and gas sector.
For the Fed, there were some changes in the statement on the economy and inflation:
- December: “Economic activity has continued to expand at a solid pace. Since earlier in the year, labor market conditions have generally eased, and the unemployment rate has moved up but remains low.”
- January: “Economic activity has continued to expand at a solid pace. The unemployment rate has stabilized at a low level in recent months, and labor market conditions remain solid.”
- Key Change:
- December: Recognized a softening in labor market conditions and a slight rise in unemployment.
- January: Describes the unemployment rate as stable and labor market conditions as solid, suggesting less concern about labor market weakness.
2. Inflation:
- December: “Inflation has made progress toward the Committee’s 2 percent objective but remains somewhat elevated.”
- January: “Inflation remains somewhat elevated.”
- Key Change:
- December: Acknowledged progress toward the inflation target.
- January: Removed reference to progress, focusing instead on inflation remaining elevated, signaling ongoing concerns.
The inflation change was thought to be a bias tilt to the hawkish side but later Powell clarified that it was just a “language cleanup” . As Steve Liesman commented on CNBC, it is not good when you have to explain what you meant in what you said.
Overall, Fed Chair Jerome Powell affirmed that his view of rates being “meaningfully restrictive” has not changed, emphasizing that current policy is well-positioned to achieve the Fed’s inflation goals. He clarified that the removal of the phrase “progress towards the inflation goal” in the Fed’s statement was not intended to signal a policy shift but was instead a matter of “language cleanup.” Powell also noted that further labor market weakening is not necessary to meet the inflation target, as the Fed sees clear pathways for continued disinflation.
Powell highlighted signs of progress in reducing inflation, including a steady decline in owners’ equivalent rent (OER), though he acknowledged that “non-market” prices remain stubbornly high. He expressed confidence in further disinflation being in the pipeline, signaling optimism about the Fed’s ability to guide inflation down. However, he stressed the importance of patience, stating that the Fed is not in a hurry to make further adjustments and will wait for more clarity from the economy and government policy.
The Fed Chair underscored that current policy remains above most estimates of the neutral rate and is already having meaningful effects on the economy. While acknowledging AI’s significant impact on financial markets, Powell reiterated that the Fed’s focus remains squarely on macroeconomic conditions. The Fed is holding steady for now, awaiting additional data and developments before making any further policy moves.
As the dust settled, the odds of a cut in March moved down to 22% from 30%, while the chance for a June cut fell to 71% from 74% and for December remained unchanged at 61%
What did the market do?
The USD is closing marginally higher (with the exception of the USDJPY which saw the greenback move down -0.14%.A summary of the greenback’s moves today against the major currencies shows:
- EUR: +0.14%
- JPY -0.14%
- GBP, unchanged
- CHF +0.37%
- CAD +0.17%
- AUD, +0.38%
- NZD , +0.25%
In debt market, yields are mixed with the shorter end higher and the longer end marginally lower, However, yields have come off from their highest levels:
- 2-year 4.219%, +1.5 basis points
- 5 year 4.339%, -0.5 basis points
- 10 year 4.536%, -1.3 basis points
- 30 year 4.778%, -1.2 basis points
US stocks closes lower on the day with the Nasdaq the laggard:
- Dow industrial average -136.83 points or -0.31% at 44713.52
- S&P index -28.39 points or -0.47% at 6039.31
- NASDAQ index -101.26 points or -0.51% at 19632.32
- Russell 2000 -5.76 points or -0.25% at 2283.09.
After the close, Microsoft, Tesla and Meta announced earnings:
- Microsoft shares are currently down -1.43%
- Meta shares are trading down -0.76%
- Tesla shares are trading up 3.32%
IBM also announced, and it’s stock price is up 7.7%
On the economic calendar, the US trade deficit soared to $-122 billion. Importers are probably reacting to the expected Trump tariffs. With inventories also lower than expected, the Atlanta FedGDPNow growth estimate for the fourth quarter tumble to 2.3% from 3.2%.
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