Morning Market Brief: Wednesday, May 3, 2023

Previewing the Fed’s interest-rate announcement

The US Federal Reserve Board (Fed) is expected to raise interest rates by 25 basis points today. Although recent banking failures might help cool the economy and lead to tighter lending standards, Fed officials will likely focus on addressing persistent inflationary pressure. ?

• Inflation slowed but remains elevated, suggesting prices are still increasing faster than the Fed wants. Annual inflation fell to 5% in March 2023 compared to 9.1% in June 2022.
• The core personal consumption expenditures price index, excluding food and energy prices, fell slightly to 4.6% in March versus 4.7% in February. The Fed closely monitors the index.
• Slowing but still strong US jobs data supports the Fed’s case for raising interest rates. In March, 236,000 jobs were added to the US economy, the lowest since December 2022.?
• Voluntary job terminations in the US fell by 129,000 in March to 3.85 million, according to the US Bureau of Labor Statistics. With the pandemic-related hiring spree well behind us, labour demand in the US is still robust but now adjusting to a more normal level.
• The debate over a possible Fed pause continues. The Fed raised interest rates nine times since March 2022, and in March 2023, it lowered its 2023 gross domestic product outlook to 0.4%.

Although the Bank of Canada (BoC) considered raising interest rates in April, it maintained its target overnight rate at 4.5% due to data indicating easing inflation and a cooling job market. However, some analysts cautioned Canadians not to expect an interest-rate cut in 2023. Canadian, US and international investors will closely monitor today’s guidance from the Fed as it navigates the challenges of interpreting economic data and staying on course toward lower inflation. In preparation for the full range of economic cycles, it’s important to maintain a well-diversified portfolio to minimize the impact of economic fluctuations or unexpected announcements. ?

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