US leaves federal funds rate unchanged, despite Canada already cutting rates

Last week the Bank of Canada (BoC) reduced the policy rate by 25 basis points (bps), but today the US Federal Reserve (Fed) didn’t follow suit. Today, the Fed once again maintained the target range for the federal funds rate at 5.25%-5.5%.

In the Federal Open Market Committee (FOMC) statement, the Fed acknowledged that economic activity continues to expand at a solid pace—which is good news. It also confirmed inflation eased over the last year and progress is being made to bring it down to the target rate of 2% (also good news). However, it still remains elevated.

CIBC Capital Markets says actions speak louder than words. But with no actions today, the Fed used some dovish words to prevent market interest rates from climbing. A rate cut is expected and fully priced-in for September with more cuts expected by the end of the year. CIBC Capital Markets confirms the most important update to the FOMC statement today is that it’s now monitoring risks to both inflation and employment, rather than only inflation risks.

Why isn’t the US cutting rates yet?

Michael Keaveney, Vice President, Managed Solutions, CIBC Asset Management says today’s Fed rate announcement was widely expected. “Most observers are looking past today’s decision and into the accompanying comments for signals as to whether a rate cut is coming in September—which is likely. To date, the US economy has been more resilient than Canada’s. This has given the Fed more reason to wait on rate cuts.”

How is the rate decision affecting markets?

Mr. Keaveney confirms “US government bond prices rose today across maturities, and the US 10-year government bond yield declined to 4.10% in the moments after the rate announcement and into the press conference. The US equity market rallied today and was among the leaders in global equity markets—driven by Information Technology stocks. Interest rate sensitive sectors such as utilities, real estate and financials were also increased today, but lagged other sectors.”

As we move into the fall and the US elections, it’s important to remain focused on your long-term investment goals and accept short-term market volatility as a natural part of the market cycle.

CIBC Asset Management is committed to providing market and investment insights. We want to help you find the right solutions to guide your investment journey. If you'd like to discuss this market and economic update in more detail or have questions about your investment portfolio, please get in touch with your advisor or CIBC representative anytime.

?

The views expressed in this document are the views of CIBC Asset Management Inc. and are subject to change at any time. CIBC Asset Management Inc. does not undertake any obligation or responsibility to update such opinions. This document is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this document should consult with his or her advisor. All opinions and estimates expressed in this document are as of the date of publication unless otherwise indicated, and are subject to change. CIBC Asset Management and the CIBC logo are trademarks of Canadian Imperial Bank of Commerce (CIBC), used under license. The material and/or its contents may not be reproduced without the express written consent of CIBC Asset Management Inc.

Certain information that we have provided to you may constitute “forward-looking” statements. These statements involve known and unknown risks, uncertainties and other factors that may cause the actual results or achievements to be materially different than the results, performance or achievements expressed or implied in the forward-looking statements.

?