The U.S. Federal Reserve cut interest rates by 25 basis points for the first time in a decade. Anthony Okolie talks with James Orlando, Senior Economist, TD Bank Group.
- The Fed cut interest rates by 25 basis points today, as expected, but there wasn't much change in the language. James, what caught your attention today?
- Yeah, for us, it was more about consistency. About a month ago, the Federal Reserve came out and they said things haven't really gone to plan. There's been a little bit of weakness in the economic data, and so we're ready to act, if necessary. So today with the interest-rate cut, they've really followed through on that.
- Some people are calling this the most important Fed meeting in 10 years. What's your take on that?
- Yeah. I think it's a huge meeting right now. It's the first time they've cut rates in over a decade. The last time they did it was during the financial crisis. So when people are paralleling this move to that, it's really not that fair. What it really is and the significance of it is that the Federal Reserve is showing that it's willing to act in the face of any sort of adversity and it's willing to get ahead of any sort of weakness in the economic data.
- And you talk about adversity and risk. What are some of those risks to the economy?
- So the main risk that the Federal Reserve has talked about is the fact that there's weakness internationally with respect to growth. That's playing through to business confidence, business investment, and also inflation. And so until that starts improving, the expectation is the Federal Reserve will try to be there to help out the overall economy.
- And in the past we've seen the Fed kind of being data dependent, but they seem to be more focused on global risks and global trade tensions. How do you account for that change in tone?
- So I still think the Federal Reserve is very much data dependent. If you look at what's happening in the labor market, things are doing well, so to your point. Also, when we think about what's happening in overall consumer spending, everything is looking fairly good on that front. It's just one area of the economy isn't doing very well, and what we're seeing is that the international growth profile and what's happening globally is starting to impact the US market.
So when you think about manufacturing, that's playing into manufacturing in the United States. You look at production that's geared towards exports. That's starting to decline in the US. And so we're seeing that play out through business confidence as well, and the worry is that when businesses lose confidence, the first thing they do is they cut investment. We're already starting to see that. Now that's partly to do with the fact that we have trade tensions. Now if this continues and things get worse, what we're worried about is that businesses will then start cutting labor, and that's when you really start seeing bleed over to the overall economy into the labor market, into overall spending.
- So given all of that, where do you see interest rates going? Do you see this as a one-and-done cut, or do you see more?
- So our expectation is the Federal Reserve's going to have to cut again. Part of that is to do with the fact that we don't think it's going to be very quick for the momentum that we're seeing in manufacturing and business confidence to bounce back. It'll take a little bit of time for that to happen. And the other factor is that we still have a lot of issues with respect to trade tensions. Is that going to go away? If it gets worse, then it's almost likely you're going to have worsening business confidence. The Federal Reserve is going to have to keep acting.
- Finally, will the Bank of Canada follow the US in cutting rates?
- So right now, the Bank of Canada has not communicated that it's ready to follow Federal Reserve, and that's for two reasons. The first is that the US rates right now are already higher than that of the Bank of Canada. So with the Federal Reserve cutting rates, it's more moving to where the Bank of Canada rate is right now.
And the second reason is that when the Federal Reserve does cut rates, what happens is that impacts yields globally. We've already seen that spill over into the Canadian market. Mortgage rates, for example, are coming down significantly in Canada right now. So in that way, the Bank of Canada doesn't have to do anything, and it's already starting to get some of the boost from the Federal Reserve rate cut.
- James, thank you very much for your time.
- Thank you for having me.