While both the Fed and the Bank of Canada are easing rates, the pace of cuts is expected to vary. The US is on a slower path to lowering interest rates due to several factors. The US economy has been less sensitive to rate hikes as many consumers and firms locked in low interest rates during the pandemic, and GDP has remained strong. Additionally, the US is experiencing a big structural boom in AI and data centers, and fiscal policy remains supportive with a large budget deficit driven by the CHIPS Act, Inflation Reduction Act, Infrastructure Act, and defense spending. These factors have collectively offset the impact of rate hikes on highly leveraged consumers and firms. This scenario is unique to the US, which is why the US business cycle remains strong, while economic cycles in the rest of the world are comparatively weaker.
Although October’s US employment data appeared to weaken, much of the decline resulted from the impact of labor strikes and hurricane-related disruptions. The Bureau of Labour Statistics noted that the number of US workers unable to work due to bad weather was 512,000, compared to a typical 56,000. While the jobs data was worse than expected, the numbers were muddied by a number of factors. The Fed likely focused on the revisions to previous data which showed continued labor market softening. This suggests that the Fed can continue the process of monetary normalization, with quarter point cuts likely at the upcoming November and December FOMC meetings.
In Canada, much ink was spilled over the Bank of Canada’s 50-basis point cut in October, with some labelling it as “supersized” and speculating that similar cuts will follow. While the Bank wants to be consistent in its approach, the 50-basis-point cut was warranted by recent economic data and concerns over downside risk—it shouldn’t be interpreted that the economy is crashing. August’s real GDP was flat, and July’s gain was revised down to a modest 0.1 per cent, indicating weak third-quarter growth of around 1 per cent, well below the Bank’s revised estimate of 1.5 per cent. This has increased speculation of another 50-basis-point cut at the December 11th meeting. However, key data releases ahead of the meeting—including two labor force reports, another CPI report, and one more GDP report—will provide a fuller Q3 picture and could influence the Bank’s decision. Statistics Canada’s flash estimate is calling for a strong 0.3 per cent month-over-month GDP increase. A 25-basis-points cut is likely, but it’s too early to say that a 50-basis point cut is certain.
Housing Affordability Watch
CMI monitors the latest developments and offers insights on solutions to Canada’s housing affordability crisis
The Conservatives plan to eliminate the GST on new homes sold for under $1 million if elected, which could lower costs for homebuyers—especially if provinces follow suit. But will municipalities seize this opportunity to raise local fees to fill the funding gap?
Explore the potential implications of this proposal in our latest Housing Affordability Watch instalment: Examining the Conservatives’ Plan to Eliminate the GST on New Homes Under $1 Million
Independent Opinion
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