In a recent speech, Federal Reserve Chair Jerome Powell commented that, “the economy is not sending any signals that we need to be in a hurry to lower rates.” However, the market didn’t react much to his comments, since fixed income investors had already determined that, given the strength of the economy and recent inflation stickiness, the Fed wouldn’t be in any hurry to cut rates.
The US economy continues to show strength, with Gross Domestic Product (GDP) growing at a robust 2.8 per cent in the third quarter, and unemployment remaining low at 4.1 per cent. Despite the aggressive tightening of monetary policy between March 2022 and September 2024, the economy has weathered the Fed’s moves well.
Inflation has eased from its 2022 peak but is certainly not dead. The latest monthly core Consumer Price Index (CPI) translates into an annual price increase of 3.6 per cent.
The Republican sweep at the ballot box—winning the presidency, the Senate, and the House—increases the likelihood that President-elect Trump will push forward with big tax cuts and tariffs, which would add to inflation.
In the bond market, ten-year Treasury yields averaged 4.10 per cent in October, up 38 basis points from the September 16 low of 3.72 per cent. So far in November, we’ve seen higher rates, with the 10-year Treasury closing at 4.426% on November 15, reflecting the concerns noted above.
The key question is how much room the Fed has left to cut rates—possibly 125 basis points, which would help move 10-year rates below 4 per cent. However, the Fed could cut rates at a slower pace than anticipated. Canadian 10-year rates averaged 3.19 per cent in October, up 25 basis points from 2.94 per cent in September. So far in November, they’ve climbed to around 3.25 per cent, with the Canada–US spread around -110 basis points. This differential is largely due to improved inflation and fiscal performance in Canada, but it is unlikely to widen much further from here.
Despite strong market share competition among Canadian banks, 5-year mortgage rates appear to be stuck in a narrow range for the near term, as the Fed sees no urgency to cut rates.
Housing Affordability Watch
CMI monitors the latest developments and offers insights on solutions to Canada’s housing affordability crisis
In a recent speech, the Bank of Canada’s Carolyn Rogers warned against “tinkering too much” with the mortgage market. But what if we’re not tinkering enough? If we want to improve affordability, targeted changes to our mortgage finance system are essential. Now is the time to broaden the focus beyond financial stability to improve mortgage market efficiency and better support long-term affordability.
Read our latest Housing Affordability Watch to learn more: Are We Tinkering Enough with the Mortgage Market?
Independent Opinion
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