As was widely predicted the U.S. Federal Reserve has gone ahead with an interest rate cut. It is the first reduction by the American central bank since the financial collapse more than a decade ago.
The Fed trimmed a quarter-point off its benchmark rate bringing it to a range of 2.0% to 2.25%, and a step closer to the Bank of Canada’s policy rate of 1.75%. It remains unlikely the BoC will be doing anything to widen that gap any time soon.
The economies in both countries are strong with good employment numbers. Some market watchers have noted that the data do not make a clear argument for the cut. Fed chair Jerome Powell characterized the move as pre-emptive, against downside risks.
The U.S. did report a one percentage point drop in GDP growth in the second quarter, dipping to 2.1%. It pointed to headwinds from slowing global growth and ongoing trade conflicts. Given that those conflicts have been triggered by the current U.S. administration the Fed’s 25 basis point cut can been seen as more political than economic, with the “headwinds” blowing out of the White House.
Canada, on the other hand, saw GDP increase 0.2% in May. Thirteen of 20 sectors advanced, led by manufacturing. Annual GDP growth now stands at 1.4%. The Bank of Canada appears happy with that. It is also satisfied with the jobs picture and inflation.