After mirroring rate hikes, the U.S. Fed and Bank of Canada are now diverging
As interest rates approach their peak, an intriguing stand-off has emerged between North America’s major central banks and financial markets.seem determined not to allow their gaze to drift to the future. The financial markets are already there. And each seems increasingly determined to sway the thinking of the other.
And it seems the more markets are willing to talk about the timing of rate cuts, the more central bank leaders are pushing back with their “hey, not so fast” rhetoric.raised its policy rate to 4.5 per cent “I think it’s far too early to be talking about cuts,” he said. In fact, he said it three times in the space of about half an hour.
But the markets are increasingly tuning out. They see inflation on a decidedly downward trajectory that looks all but certain to gain steam over the next few months, and a very possible recession on the horizon. They’re preparing for a reversal of course in interest rates, even if the central banks claim they’re not.
Based on the market reaction to the Fed’s message Wednesday, it doesn’t look like the threat of more rate hikes is having the desired effect. The market pricing of rate cuts by fall actually increased a bit after Mr. Powell’s news conference. The thing is, the more central banks are willing to raise rates, the more likelihood that they’ll tip the economy into a significant recession – which actually strengthens the case for rate cuts.
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