The U.S. Federal Reserve is set to make a historic move by cutting interest rates on Wednesday, marking a significant shift in monetary policy. The decision comes in response to gradual softening in the labor market and slowing inflation, indicating that the current high interest rates are no longer necessary.
According to experts, the U.S. unemployment rate saw a slight decrease in August, but this followed a trend of increasing rates over the past year. This rise in unemployment was attributed to a combination of slower hiring demand and a growing labor supply, fueled by an increase in immigration. These factors have led to concerns that growth in consumer prices, particularly in service components, may not accelerate even with steady consumer spending.
As a result of expectations for continued low inflation, the Federal Reserve is expected to embark on a path of easing interest rates. Analysts predict that the Fed’s Summary of Economic Projections will show a median of 75 basis points worth of cuts this year, a significant increase from the 25 bps that was previously anticipated in July. Federal Reserve Governor Powell is expected to tread cautiously in his comments, hinting at potential future rate cuts without committing to a specific course of action to allow for flexibility in future decisions.
In Canada, inflation trends have also been on the decline. The consumer price index report for August is expected to show a further decrease in headline price growth to 2.1% year-over-year from 2.5% in July, just above the Bank of Canada’s 2% inflation target. The slowdown in August is primarily attributed to lower gasoline prices, with core CPI measures also expected to trend lower.
Looking ahead, experts predict that while the U.S. economy is not expected to falter, growth may slow due to significant fiscal spending expected in the coming years. Conversely, underperformance in the Canadian economy is anticipated to persist. Both the Bank of Canada and the Federal Reserve are expected to implement 25 bps rate cuts at each meeting, with the Bank of Canada reaching a relatively lower terminal rate of 3% compared to the Federal Reserve’s expected range of 4 to 4.25% by the second quarter of next year.
The upcoming week will see key economic data releases that will provide further insights into the state of the economy. Manufacturing sales in Canada are expected to increase by 1.1% in July, led by higher sales in the petroleum and coal, as well as chemical subsectors. Retail sales in Canada are forecasted to have increased by 0.6% in July, with a slight dip in auto sales and lower gasoline prices likely contributing to the growth.
On the housing front, the Canadian Real Estate Association (CREA) is set to publish August resale housing statistics next Monday. Early reports suggest that there has not been a sharp resurgence in home resales following initial interest rate cuts by the Bank of Canada. However, further rate cuts are expected to stimulate homebuyer demand gradually across the country.
In the U.S., retail sales are projected to have decreased by 0.6% in August, with lower gas prices and auto sales contributing to the decline. Industrial production is expected to have increased by 0.1%, driven by higher output in the mining and utility sectors.
Overall, the decision by the U.S. Federal Reserve to cut interest rates reflects a proactive approach to addressing economic challenges and supporting growth. The move is expected to have implications for both the U.S. and Canadian economies, with analysts closely monitoring developments to assess the impact on various sectors and industries.
