Report by TD Economics

Highlights

• The Fed is finally ready to cut interest rates, but questions remain on the speed and magnitude.
• We penciled in 25 basis points per meeting, with over 250 bps in cuts over this year and next.
• However, now that the Fed is confident that inflation will return to target, it will prioritize a little more of the other side of its dual mandate – developments in the job market – to ultimately determine the speed and size of rate cuts.
• The BoC has moved earlier, established a pace of 25 basis points per meeting, and already gapped 100 basis points to its U.S. counterpart. The economic bar will be higher to deliver on larger cuts than the current pace.

The Federal Reserve is just under three weeks away from delivering its first interest rate cut in four years. While at times it felt like the day would never come, inflation has finally stabilized close to the 2% target alongside a noticeable cooling in the labor market. The Fed’s focus has now pivoted away from just fighting inflation, to striking the right balance on its dual mandate to ensure the economic landing remains a soft one. This is the stage where markets typically get nervous on whether the Fed has got the timing right, evidenced by recent bouts of financial volatility. The emphasis will be on downside misses in the data given that the Fed’s policy rate is sitting at a lofty level of 5.50%. And with that, we can expect to see pricing jump around between a Fed that needs to act urgently to one that can move in a measured way. But in all circumstances, one prediction will hold firm: the Fed will cut interest rates in September, kicking off a prolonged cycle. This is not a one-and-done deal.

https://economics.td.com/ca-dollar-and-sense