BoC and Fed Relationship: It's Complicated

US Federal Reserve Raises Rate

We haven't spent a lot of time focused on what moves the Bank of Canada's (BoC's) American counterpart makes. But yesterday's rate announcement by the US Federal Reserve Board (Fed) was one that was highly anticipated. Just two weeks ago, Fed chair Jerome Powell took an openly strong stance on US economic performance suggesting the result of the March 22nd meeting would see a 0.5% increase to their policy rate. And then, Silicon Valley Bank collapsed. And the narrative changed. The tone of the Fed softened as did the rate increase; 0.25%. And there are some that believe even that was too much.

Canada and US are historically tied together. The economic relationship runs deep. And even though Canada is it's own country with differing factors than our southern counterparts, we are still but a small ship in a vast economic ocean. The BoC is on pause for the time being. The rate hikes we have seen so far are doing their job and the missing ingredient here is most likely time; not more rate increases. But if the Fed carries on much higher with their policy rate, it has the potential to move the BoC off their stance. Too wide a gap between the BoC and Fed policy rates would be a problem for our dollar and our economy. So the softer tone and rate decision yesterday is one that is welcome here at home.

There's an old saying that when the Fed slams on the brakes, someone goes through the windshield. Well, the Fed has slammed on the brakes. And some banks went through the windshield. The issue going forward is that we're not sure who else wasn't wearing their seat belt. And this is the reason for the shift in tone by the Fed. Some things are bound to break with rate hikes on the order of magnitude we have seen so far. And though the Fed isn't looking at a pause as we are, the shift in tone certainly moves them closer to the current BoC stance than what we saw just a short time ago.

What Comes Next

​

It's looking more and more like we've hit the peak of interest rates. Statistics Canada released February's inflation numbers on Tuesday and the downward trend continued. Coming in at 5.2%, compared to January's 5.9%, inflation in February came in lower than anticipated. Which is good news overall. And it is expected that CPI should come in under 3% by the summer. But, there is still some concern on the BoC's part that getting down to that 2% target could be tricky. There are some components of inflation that will potentially prove to be more stubborn. And that will force TIff Macklem and the Governors of the BoC to remain vigilant.

As I mentioned last week, rate expectations this year have played jump rope with the next BoC move. Consumers and experts are highly sensitive to any data or messaging that comes out and we are unsurprisingly reactive. And though predictions are a dangerous game these days, I think that when the BoC makes it's next move, it will be downward. And we'll see that before the end of 2023. Markets are pricing in at least one 0.25% rate cut by July and more cuts for the balance of 2023. That may be a bit on the aggressive side but what we're watching for now is how the effects of the rate increases we've seen unfold. Will we see more collateral damage that triggers a recession (and how severe might that recession be)? Will inflation continue downward to the 2% target or prove to be a little more stubborn? And what will happen with wage growth and productivity? 

What to do?

​

If you're in a variable rate, this has been your dominant question. Fixed rates have almost certainly peaked and will trend downwards. Variable rates will follow. If you're suffering from rate-hike-induced-PTSD, shorter term fixed rates (2 and 3 year terms) have seen some pretty steep drops over the last couple of weeks and are a little more attractive. But like all decisions - there is a tradeoff: Variable rates will come down as well. Moving to a fixed rate will take you off the roller coaster but it could mean some savings get left on the table. We're happy to help you through your options to find out which is best for you. Don't hesitate to reach out.

And hey, share this with a friend. Or a family member. We're not fussy. If you think someone could benefit from our guidance, we'd love an introduction! We're always here to help.