Morning Market Brief: June 13, 2024

Fed unanimously holds policy rate steady?

North American equity markets hit all-time highs ahead of the US Federal Reserve Board’s (Fed) decision to hold interest rates steady for a seventh consecutive meeting. Softer US inflation data released earlier yesterday morning supported market optimism about potential rate cuts in 2024. A continued downward trend in inflation could prompt the Fed to lower rates, which sit at two-decade highs.?

• Fed Chair Jerome Powell confirmed the labour market remains robust but is slowing. Powell highlighted the Fed’s dual mandates of maximum employment and stable prices. Broadly, labour market conditions have returned to those seen just prior to the pandemic.
• The Fed’s target rate remained in the range of 5.25% to 5.50%. Based on how the economy evolves, Powell emphasized policymakers were prepared to hold steady or cut as needed.
• The Federal Open Market Committee acknowledged that inflation had eased but remained elevated. Progress towards the 2% inflation target was described as “modest.”
• Economic growth forecasts remained unchanged at 2.1% in 2024 and 2% in 2025. However, the Personal Consumption Expenditure inflation forecast for 2024 was raised to 2.6%.
• Fed policymakers expect, on average, one rate cut in 2024 and four in 2025. Although all panel members voted to hold rates, there was a lack of consensus about expectations. Eight members of the committee expected two cuts in 2024, seven expected one cut and four voted for no cuts.
• Canadian and US interest rate policies could diverge. Bank of Canada (BoC) Governor Tiff Macklem acknowledged this possibility and said that rates are not close to the “limits” of divergence. Last week, the BoC pivoted to reduce its key interest rate to 4.75%.

Economists believe a rate cut in September is more likely than at the next meeting in July. Policymakers are balancing the risks of holding rates high for too long, which could weaken the economy, and cutting too soon, which could fuel inflation.

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