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US Fed rate cuts likely this year

Your mortgage news update for the week of February 2, 2024

Memo 1: US Fed strengthens rate cut expectations

New progress was made this week in North America’s inflation fight, as the US Federal Reserve – the American counterpart to the Bank of Canada – held its trend-setting federal funds rate unchanged at 5.25% - 5.50%.

While this fourth-consecutive rate hold was widely anticipated, it was a shift in the Federal Open Market Committee’s language that cheered markets; unlike previous announcements, this one omitted language on the necessity of future rate hikes, bolstering expectations of rate cuts in the near future.

According to the announcement, while the US economy continues to run at a “solid pace”, inflation has eased enough to satisfy policymakers, achieving a “better  balance”.

Fed Chair Jerome Powell doubled down on this progress in the press conference following the announcement, stating, “We believe that our policy rate is likely at its peak for this tightening cycle and that, if the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint at some point this year.” 

However, he cautioned that the economy has “surprised forecasters in many ways since the pandemic,” and that achieving 2% inflation is still not assured, given the economic outlook remains uncertain.

Also read: December CPI rises to 3.4%

Powell was cautious to temper market expectations that rate cuts could be as imminent as March, saying plainly that this is "not the most likely case." 

“The economic outlook is uncertain, and we remain highly attentive to inflation risks. We are prepared to maintain the current target range for the federal funds rate for longer, if appropriate,” he added.

The Fed’s latest move mirrors that of the Bank of Canada’s January rate announcement, in which our central bank held its overnight lending rate at 5% for the fourth time in a row, and dropped any rate tightening bias from their language. Overall, these central bank moves strongly indicate the rate hiking cycles that have plagued borrowers over the past 24 months have come to a close, with analysts anticipating cuts as early as April or June. All eyes will be on the BoC’s next announcement on March 6 for further hints as to rate cut timing.

“With the Fed seeing risks coming into better balance, it’s pretty clear the next move will be a rate cut. In fact, it was the only path forward discussed in the statement,” wrote Desjardins Principal Economist Francis Généreux in an economic note.

“So it's no longer a matter of what will happen next, but when. We knew as much from the projections released in December, which showed that the next moves would be interest rate cuts later this year. But the Fed is now saying it wants greater confidence that inflation is moving sustainably toward its 2% target before lowering rates. That means US monetary policy now hinges on the Fed’s confidence level.”

Memo 2: Canadian GDP comes in stronger than expected in November

After a lengthy stagnation, the Canadian economy appeared to perk up toward the end of 2023; according to the latest data from Statistics Canada, real GDP grew by 0.2% in November, following three months of flatness. It was a larger-than-expected gain, and the measure’s first upward movement since May.

The growth was largely concentrated in goods-producing industries, which rose 0.6%, followed by a 0.1% gain in services-producing industries and an 0.8% increase in industrial production. Economists expect December to post a similar performance, leading to overall growth in the final quarter of the year.

While a strengthening economy sounds like positive news, it is the opposite of what the Bank of Canada wants to see, as it grapples to control the growth of inflation. Stronger-than-expected economic data could potentially delay the central bank’s plans to cut interest rates this year – but this report is unlikely to move the dial, writes RBC economist Claire Fan.

“​​The reacceleration of growth towards the end of 2023 should be taken with a grain of salt – early GDP estimates are revision-prone and a lot of the strength in November was due to one-off factors such as recoveries from earlier factory shutdowns and strike activities that are unlikely to be repeated in the following months,” she writes.

“Taking the advance December estimate at face value, growth in Q4 is tracking an annualized increase of 1.2% which is above our tracking for a small decline. That however would still mark a sixth consecutive quarterly decline when growth is counted on a per-capita basis, as population growth continues to surge. Overall we continue to expect pressures from elevated interest rates to curb consumer demand, stalling growth in both output and inflation over the first half of 2024 before the BoC is expected to cut rates in June.” 

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Memo 3: Rate hikes have hit real estate agents right in the wallet

It’s no secret that Canada’s housing market has drastically chilled over the last two years; after one of the hottest run-ups in home prices and sales in history during the pandemic, demand plummeted as the Bank of Canada’s rate hikes kicked off in March 2022.

According to the Canadian Real Estate Association, 2022 annual home sales plunged by nearly 40% compared to the previous year – and now the data is showing just how hard that’s hit real estate agents’ wallets.

A report from StatCan finds that operating revenue for agents and brokers fell by over one-fifth (21.8%) in 2022, down to a cumulative $20.9 billion. That’s in comparison to the record high achieved in 2021, of $26.7 billion.

“Higher borrowing costs dampened existing home sales through 2022, as the Bank of Canada raised the policy interest rate seven times, going from 0.25% in January to 4.25% in December,” states the report. “This also contributed to a downturn in the commercial real estate market in 2022. Despite the decline, the operating revenue of the industry was 34.5% higher than before the COVID-19 pandemic in 2019.”

And, while StatCan is still tallying the results for last year, it anticipates another dismal showing; home sales in 2023 fell to their lowest level since 2008, falling at additional 11.1% below 2022 levels.

“Operating revenue in the real estate agents and brokers industry is expected to continue to decline in 2023, as most real estate associations reported continuing weakness in both residential home resale transactions and home prices across Canada,” writes StateCan.

“The industry also faced affordability challenges because the cost of borrowing continued to increase in 2023. Commercial real estate transactions also trended lower in major markets throughout most of the year. A comprehensive look at how these factors shaped the real estate agents and brokers industry in 2023 will be provided when data from the next annual survey become available.”

Penelope Graham, Director of Content

Penelope has over a decade of experience covering real estate, mortgage, and personal finance topics and her commentary on the housing market is featured on both national and local media outlets.