The Federal Reserve held its key interest rate steady for a fourth consecutive time but signaled it’s not in a rush to cut rates, warning that inflation remains elevated. Anthony Okolie speaks with Scott Colbourne, Managing Director & Head of Active Fixed Income, TD Asset Management, about the Fed’s latest rate decision.
* Now, the policy statement took out a key clause on additional hiking, but added some language that dampened hopes for an imminent rate cut. Now, so it's a bit of something for everyone. What's your take on this?
* Yeah. Hi, Anthony. It was a pretty much as-expected announcement. As you pointed out, they took away the hiking bias, and that was what the investors have been looking for. Somewhat similar to here in Canada, they removed that sort of "we're going to continue to hike" bias. And now, we're on the path towards, when are they going to cut?
* And they introduced some language around the path towards confidence in a 2% inflation rate. And so it's a little bit ambiguous, a little bit vague. But that's the art of central banking here.
* And it sort of pushed back on the notion that we're going to get an imminent cut in March-- not a zero probability of a cut, but a little bit of uncertainty there. And so that is what the markets are trying to figure out. What's the reaction function that gives the Fed greater confidence that it's on its path to 2%? And right now we've had six months of pretty good inflation data. There's a little bit of concern over service inflation, wage inflation, shelter inflation. But on balance, the markets and the Fed believe that we're going to get to 2%, and it's just looking for some more data to give it greater confidence before it cuts.
* And talking about data, we've seen that the US economy continues to outperform its peers. How does that play into the Fed's strategy going forward?
* Well, it's been a great story. Last year when we looked back, we expected some sort of slowdown, maybe even a recession, it was necessary-- and some softness in the labor market to achieve that 2% goal. The economy and the labor market have surprised everybody. It's a good news story, broadly speaking.
And the Fed is acknowledging that, look, we don't need a recession. We don't need substantially slower growth. We don't need massive weakness in the labor market to achieve 2%. We're on that path. Maybe this is the Goldilocks soft landing. But we'll take it, and we'll continue to look for that trajectory towards 2%.
* OK. And what is the bond market telling us right now about when rate cuts might start?
* Well as I said, we're not going to eliminate all possibility of a rate cut starting in March. There's a couple more jobs data, one more CPI to come up with. And there's a host of other data that we'll see. So we'll have a lower possibility of a rate cut starting in March. I think the central tendency, and most market observers think it's going to start in May-- the Fed penciled in three in its last summary of economic projections. So we're going to have to see them start moving eventually soon.
* Now, you said that the Fed did pencil in three. How far do you see the rate cuts going this year?
* I see more than three-- probably more likely five cuts this year is sort of my central tendency.
* And why is that?
* Well, I think we're going to continue to get the data reinforcing the trajectory towards confidence in 2%. And I think we're going to continue to see evidence of a little softer growth this year. Outside of the US, whether it's Canada, or Europe, or Asia, growth continues to be on the softer side. So I think that comes into play a little bit more in the US as well.
* OK, now, I want to talk a little bit about the environment we're in right now, because we are seeing growing geopolitical tensions that threaten the global financial stability. What are some potential headwinds that could possibly change the outlook for rates going forward?
* The Fed has underscored it's a highly uncertain environment, right? So there's curve balls popping up all the time. Today, there was a community bank in New York that sort of surprised the market and questions about the outlook for regional banks. So there's a lot of that type of uncertainty that could pop up between now and any rate cut-- certainly, political and geopolitical uncertainty through the balance of the second half of this year.
* So lots of curve balls that could take us along a different path. The Fed has highlighted CPI seasonal adjustments that are coming up February 9. So there's lots of quirks that could take us along different paths this year. But I think on balance, we look for a number of cuts this year out of the central bank, both Canada and the United States. And we see a bit of a steepening of the yield curve for investors.
* Scott, thank you very much for your time.
* My pleasure, Anthony.