Federal Reserve is cutting rates, again

Global accommodating cycles are intensifying as economic apprehension and wariness over the potential of a slowdown grows.

A few days ago Fed Chair Jerome Powell announced that the Fed would cut rates again from 2% to 1.75%. This comes as the rate of home flipping (buying early, renovating and/or holding, and then rapidly selling) has reached 8 year lows and news of a manufacturing recession in Germany transitioning to the services sector hit markets. Trump can claim another big win with the Fed’s decision. Market reactions have been mixed, with many claiming the cut was premature and obviously a political sign of subservience to the President. As rates are falling, the price of gold is hitting many-year highs, the pressure on emerging market currencies are also rising.

Bloomberg, a major U.S. financial services and news organization is predicting that Central Banks in Brazil, Russia, Nigeria, South Africa, Australia, and India among many European countries will all cut rates to stimulate credit creation and softening economies. Several trends are of concern to market analysts, the aforementioned Germany slowdown one of them, but Mexican car production is also going down, as is some U.S. industrial activity. The emerging signs of industrial weakness around the world was repeatedly cited by Jerome Powell as one of the reasons he chose to cut rates again so quickly after his earlier cut. A reminder for readers that U.S. interest rates are determined by members of the FOMC (Federal Reserve Open Market Committee).

CBC News is reporting that the two rate cuts by Powell will likely force Bank of Canada Governor Jerome Powell to reduce rates here in Canada. While Bloomberg reported that it doubts a BOC rate cut in Canada for 2019, there is still time left in the year for a decision in the fourth quarter. A late 2019 rate cut would have a positive impact on real estate and consumer spending for the holiday season and would help the economy prepare for 2020. A rate cut would have a positive and immediate psychological impact on the real estate market as it would lower mortgage costs; within a few days possibly.

Bank of Canada Hikes Rates

The Bank of Canada to increased rates at its decision meeting on Wednesday, July 11th. The central bank increased its key rate to 1.5 per cent from 1.25 per cent.

bank of canada picture

The forces that favoured an increase in the cost of money outweighed those that supported continued loose money policies. The Canadian economy remains in very good shape. Inflation hasn’t reared its ugly head, household consumption is neither increasing recklessly nor falling precipitously. Growth and unemployment figures are very positive. Lack of price growth dynamism in the real estate markets, trade issues with the United States, and high levels of private and public debt are the key structural problems. Weighed against one another, the balance skews toward a rate hike.

Central Banks Around The World Are Adamant.

Central banks have begun and will continue a long term policy plan of ever higher rates, and more scrutiny on international banks and financial institutions. The Bank of Canada is no different. The key facts that most worry senior officials, politicians, and Central Bankers are the enormous levels of household and government debt, particularly mortgage debt. A generation of historically unprecedented record low interest rates has blown up large debt bubbles which elites are now desperate to deflate as carefully as possible.

Rates Hike To Negatively Impact Consumers

The likely hike will no doubt have a negative impact on consumers and on the real estate market. Banks are likely to raise their mortgage rates in response. The debt to disposable income ratio in Canada has hit a record of almost 175%, much higher than in the United States before the start of the Great Recession. A rate hike will be of no help to those looking for high prices for their real estate holdings. Debt to income ratios for the poorest Canadians are especially high. The lowest quintile of earners average a debt ratio of almost 350%. While higher rates will come at a cost, many believe they are absolutely necessary, and few doubt they are avoidable.