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Tag: Interest Rates

  • A possible upside to August’s slowing job growth

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    Employers across the U.S. added 22,000 jobs in August, falling short of economists’ muted expectations and signaling the labor market is facing sharp headwinds from mounting economic uncertainty amid the Trump administration’s wide-ranging tariffs. Jo Ling Kent has the biggest takeaways.

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  • The August jobs report has economists alarmed. Here are their 3 top takeaways.

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    Many economists say Friday’s disappointing jobs report is sending warning signals about the pace of hiring across the U.S. and the broader health of the economy. 

    Employers added only 22,000 nonfarm jobs in August, far short of Wall Street analyst forecasts of 80,000, while the nation’s unemployment rate rose to 4.3% — the highest level since October of 2021, when the economy was still reeling from the effects of the pandemic. In 2024, the economy added an average of 168,000 per month, labor data shows.

    The job market is faltering partly because of the Trump administration’s tariffs, which are heightening economic uncertainty, boosting costs for importers and complicating business planning.. Some economists also think that rapid employer adoption of artificial intelligence is hurting demand for recent college graduates and other entry-level workers, although there is ongoing debate among researchers about how much AI is affecting job growth.

    “Uncertainty makes it very, very difficult for people in companies to make decisions,” Laura Ullrich, director of economic research for North America at job-search firm Indeed and a former official at the Federal Reserve Bank of Richmond, told CBS MoneyWatch. “My former boss says that when you are driving through fog, you slow down — but if it gets thick enough, you pull over.”

    The Trump administration defended its trade and other economic policies, expressing confidence they will eventually drive growth.

    “President Trump’s trade deals have unlocked unprecedented market access for American exports to economies that in total are worth over $32 trillion with 1.2 billion people,” White House spokesman Kush Desai said in a statement to CBS MoneyWatch. “As these unprecedented trade deals and the administration’s pro-growth domestic agenda of deregulation and historic working-class tax cuts take effect, American businesses and families alike have the certainty that the best is yet to come.” 

    In response to the jobs report, President Trump on Friday posted on social media that Federal Reserve Chair Jerome Powell should have moved sooner to cut interest rates. Lower borrowing costs can stimulate job growth by driving consumer spending and making it cheaper for businesses to expand their operations.

    “Jerome ‘Too Late’ Powell should have lowered rates long ago. As usual, he’s ‘Too Late!’,” the president wrote.

    Here are three key takeaways from economists about the latest employment figures. 

    The job market is stalling 

    Overall hiring in August was far weaker than economists expected. More troubling, the numbers look considerably worse after stripping out the two sectors that showed some of the strongest growth in August — health care and social assistance. Health care companies created 31,000 new jobs last month, while social assistance — employers such as food banks and those providing services for disabled people, children and low-income families — added 16,000 new jobs. 

    But many other sectors had stagnant or even declining job growth, such as manufacturing, which shed 12,000 jobs in August, and professional and business services, which lost 17,000. 

    “Absent the secular gains in health care and social assistance, the cyclical categories of the private service sector (excluding health care and social assistance) have collectively turned negative on average in the past four months,” Nationwide chief economist Kathy Bostjancic said in a report Friday. 

    Hiring this summer was also weaker than previously thought. The Labor Department’s latest data shows employers cut 13,000 jobs in June, rather than adding 14,000 new hires as the agency had reported in its first estimate for that month. The June drop marks the first decline in monthly jobs since late 2020.

    Although July payroll gains were revised up slightly, total job growth for June and July was 21,000 lower than previously reported, according to the Labor Department. 

    Job growth is at its lowest level in 15 years

    The average monthly job gains since January represent the fewest jobs added over the first eight months of the year in 15 years, excluding the pandemic-triggered crisis period of 2020, Indeed’s Ullrich noted.

    “We haven’t added this few jobs since 2010, and we have 17 million more people in the labor market than we did then,” she said. “That, to me, is a staggering headline.”

    That loss of momentum in creating new jobs is raising concerns about the overall strength of the economy. The nation’s gross domestic product — the total value of goods and services — is expanding more slowly than in 2024, while inflation remains above the Federal Reserve’s annual growth target of 2%. 

    That combination has caused some economists to warn about the risk of the U.S. entering a period of “stagflation,” a toxic mix of high prices and weak growth. Forecasters expect Consumer Price Index data for August, which is set to be released next week, to show inflation rising at an annual rate of 2.9%, according to financial data firm FactSet.

    “Concerns about the health of the economy are starting to creep in,” Seema Shah, chief global strategist at Principal Asset Management, said in an email. “Equally, a strong inflation print next week could strike new fears about a stagflationary mix.”

    The Fed is highly likely to cut interest rates this month

    Across the board, economists on Friday said the subpar August jobs report virtually locks in a Federal Reserve interest-rate cut when policymakers meet on Sept. 17.  The question is by how much. 

    August hiring was so anemic that some economists now think the Fed could opt for a 0.5 percentage point cut — double the typical rate cut — in a bid to keep the job market on track. Traders now see a 10% chance of a jumbo cut and a 90% likelihood of a 0.25 percentage point reduction, according to CME FedWatch. Prior to Friday’s jobs report, the market was completely discounting a jumbo cut, the tool shows. 

    Some economists also think the Fed will continue trimming rates later in 2025 to counter the weak job market. 

    “With the weak job growth, the Fed is cleared to cut rates in September. The question is whether we get [0.25 or 0.50 percentage points],” Scott Helfstein, Global X’s head of investment strategy, said in an email. “We continue to believe the Fed will ease into the cutting cycle here with one rather than two, but there is some latitude here.”

    Aimee Picchi

    Aimee Picchi is the associate managing editor for CBS MoneyWatch, where she covers business and personal finance. She previously worked at Bloomberg News and has written for national news outlets including USA Today and Consumer Reports.

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  • U.S. Parents Charge Kids Interest on Loans. Here’s How Much. | Entrepreneur

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    As young Americans struggle with high costs of living and salaries that haven’t kept pace with inflation, some of them rely on loans to make ends meet.

    Nearly half (46%) of Gen Z between the ages of 18 and 27 depend on financial assistance from their family, according to a 2024 report from Bank of America.

    What’s more, even though some parents are willing to help their kids out with cash, those loans don’t always come without strings attached — sometimes in the form of interest.

    Related: Gen Z Is Turning to Side Hustles to Purchase ‘the Normal Stuff’ in ‘Suburban Middle-Class America’

    Financial media company MarketBeat.com‘s new report, which surveyed more than 3,000 parents, found that an increasing number are charging their adult children interest on family loans.

    “The Bank of Mom and Dad has always been generous, but even generosity comes with boundaries,” says Matt Paulson, founder of MarketBeat.com. “What’s striking is that while most parents don’t expect repayment — and certainly not at commercial interest rates — inflation and rising costs are starting to reshape how families think about money.”

    The average interest rate charged by parents was 5.1%, according to the data. That’s still well below the costs their children might incur elsewhere: The average personal loan rate is 12.49% for customers with a 700 FICO score, $5,000 loan amount and three-year repayment term, per Bankrate.

    Related: This Stat About Gen Alpha’s Side Hustles Might Be Hard to Believe — But It Means Major Purchasing Power. Here’s What the Kids Want to Buy.

    Only 15% of parents would be comfortable with lending their kids $5,000 or more at one time, according to MarketBeat’s research.

    Family loan repayment terms can also vary significantly by location. The top five toughest state lenders based on the interest rates parents charge were Nebraska (6.8%), Oregon (6.8%), Mississippi (6.5%), Georgia (6.4%) and Arkansas (6.3%), the report found.

    Parents in Delaware and Maine tended to be the most lenient when it came to charging their children interest on loans, with 2% and 4% rates, respectively, according to the findings.

    Related: Baby Boomers Over 75 Are Getting Richer, Causing a ‘Massive’ Wealth Divide, According to a New Report

    Many parents who expect repayment also have a fast-tracked timeline in mind. Twenty-one percent anticipated seeing their loan repaid in one month, 15% within one year and just 8% more than a year later, per the survey.

    Although 59% of parents reported being happy to help their kids with money, 27% said they would only do it if necessary, and 4% admitted to feeling resentful.

    In many cases, family loans don’t just provide financial support — they’re also “emotional transactions that test trust, responsibility and family dynamics,” Paulson notes.

    As young Americans struggle with high costs of living and salaries that haven’t kept pace with inflation, some of them rely on loans to make ends meet.

    Nearly half (46%) of Gen Z between the ages of 18 and 27 depend on financial assistance from their family, according to a 2024 report from Bank of America.

    What’s more, even though some parents are willing to help their kids out with cash, those loans don’t always come without strings attached — sometimes in the form of interest.

    The rest of this article is locked.

    Join Entrepreneur+ today for access.

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    Amanda Breen

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  • Trump official lodges new criminal referral against Fed Governor Lisa Cook

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    (CNN) — A Trump administration housing official has sent a new criminal referral to the Justice Department against Federal Reserve Governor Lisa Cook, as she sues the administration to fight the president’s efforts to fire her.

    The new criminal referral, made late Thursday and revealed in a social media post by Federal Housing Finance Agency director Bill Pulte, alleges Cook identified a property in Cambridge, Massachusetts, as a second home on official documents, but instead used it as an investment property.

    Cook, the first Black woman to serve as a Fed governor, has filed a lawsuit challenging President Donald Trump’s firing of her earlier this week. A hearing on that suit took place Friday morning.

    The battle over Cook’s job is about more than one position: The nation’s central bank operates independently so that officials can make economic decisions without pressure over political considerations. Trump’s attempts to fire Cook – and to force the bank to cut interest rates – get to the heart of the question about the Fed’s independence and whether Trump’s presidential powers have limits.

    The Fed has been resistant to cutting rates this year, citing Trump’s tariffs and their potential to raise inflation. Trump, however, has repeatedly demanded lower borrowing costs, often lobbing personal insults in the process.

    Cook has not been charged with any crimes.

    At the Friday hearing on her civil suit, her attorney, Abbe Lowell argued the mortgage fraud allegations are a pretext because of Trump’s political ire with the Fed for not lowering interest rates.

    In a statement to CNN, Lowell denied there was any validity to the allegations against his client.

    “This is an obvious smear campaign aimed at discrediting Gov. Cook by a political operative who has taken to social media more than 30 times in the last two days and demanded her removal before any review of the facts or evidence,” Lowell said in the statement. “Nothing in these vague, unsubstantiated allegations has any relevance to Gov. Cook’s role at the Federal Reserve, and they in no way justify her removal from the board.”

    In court Friday in Cook’s civil case, the Justice Department didn’t acknowledge any criminal investigation it may be conducting.

    But lawyers for the department have argued to a judge weighing the legality of her firing that “a Governor’s failure to carefully read her own financial documents casts a shadow over the Federal Reserve’s decisions,” according to a Justice Department court filing this week.

    Still, the Justice Department has tasked Ed Martin—whom the attorney general is using as a special investigator for a smattering of politically charged allegations that President Donald Trump is interested in—to look into the allegations around Cook, according to a person familiar with the investigation.

    Many of Trump’s attacks on the Fed have been focused on Fed Chair Jerome Powell, whom he appointed during his first term in office, and who was reappointed to another term under President Joe Biden.

    Trump has not tried to remove Powell, despite threats that he might do so. Some of those threats prompted a sell-off in US equity markets by investors concerned about Fed independence. The president does not have the power to remove a member of the Fed Board except “for cause,” not just because of a disagreement over monetary policy. But Trump used the allegations of mortgage fraud against Cook as justification for her removal.

    In the Thursday referral to the DOJ, Pulte described the new allegations as “extremely troubling.”

    “Second homes receive lower mortgage costs than investment properties, because investment properties are inherently riskier,” he wrote.

    The FHFA had already made a criminal referral alleging that Cook committed mortgage fraud by getting mortgages for two different properties, one in Michigan, another in Georgia, and claiming on both mortgages that they would be her primary residence.

    This story has been updated with additional reporting and context.

    – CNN’s Jeremy Herb, Phil Mattingly and Evan Perez contributed to this report.

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    Chris Isidore and CNN

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  • Fed board member Lisa Cook sues to block Trump’s attempt to fire her

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    Washington — Federal Reserve Governor Lisa Cook filed suit against President Trump, Chair Jerome Powell and the Fed’s Board of Governors on Thursday, asking a federal judge to block the president’s attempt to fire her from the central bank.

    Mr. Trump announced Cook’s termination from the Fed late Monday, citing allegations she had committed mortgage fraud, which he described as “deceitful and potentially criminal.” The move came after the president spent months railing against the Fed and Powell for leaving interest rates relatively high so far this year.

    Cook filed her lawsuit in the U.S. District Court for the District of Columbia on Thursday, teeing up a legal showdown that seems destined to ultimately be settled by the Supreme Court. Her legal team asked the district court to declare that Mr. Trump’s attempted firing is “unlawful and void” and that Cook “remains an active member of the Board of Governors of the Federal Reserve.”

    “Governor Cook seeks immediate declaratory and injunctive relief to confirm her status as a member of the Board of Governors, safeguard her and the Board’s congressionally mandated independence, and allow Governor Cook and the Federal Reserve to continue its critical work,” the suit said.

    Members of the Fed board are confirmed by the Senate and serve for 14-year terms. Under the Federal Reserve Act of 1913, the president can only remove them early “for cause.” The law doesn’t specify what qualifies as “cause,” and it has never been tested in court, but it is generally understood to be malfeasance.

    In her suit, Cook’s lawyers Abbe Lowell and Norm Eisen asked the court to state that Fed board members “can only be removed for cause, meaning instances of inefficiency, neglect of duty, malfeasance in office, or comparable misconduct,” citing Supreme Court precedent. Even if the court disagrees with that standard, they wrote, the law “clearly does not support removal for policy disagreements.”

    Powell and the Fed board are named in the suit because Cook asked the court for an injunction ordering them to “refrain from effectuating President Trump’s illegal attempt to fire Governor Cook and treat Governor Cook as a member of the Board of Governors.”

    In response to the lawsuit, White House spokesman Kush Desai said the president “exercised his lawful authority” in removing Cook.

    “The President determined there was cause to remove a governor who was credibly accused of lying in financial documents from a highly sensitive position overseeing financial institutions,” Desai said in a statement. “The removal of a governor for cause improves the Federal Reserve Board’s accountability and credibility for both the markets and American people.”

    The Trump administration has argued in the past that the president has the legal right to remove at will members of federal boards that exercise “substantial executive power,” like the National Labor Relations Board.

    The Supreme Court has upheld Mr. Trump’s power to fire some board members, but said in May that the Federal Reserve is a separate case, calling it a “uniquely structured, quasi-private entity.”

    Earlier this month, the Trump-appointed director of the Federal Housing Finance Agency, Bill Pulte, accused Cook of falsifying mortgage documents by claiming two homes that she bought in 2021 as her primary residence. He alleged that Cook — an economist who has served on the Fed board since 2022 — had committed mortgage fraud, and referred the matter to Attorney General Pam Bondi and Justice Department special attorney Ed Martin.

    Days later, Mr. Trump publicly called on Cook to resign.

    At the time, Cook didn’t address the substance of Pulte’s allegations directly, but said in a statement that she had “no intention of being bullied to step down from my position because of some questions raised in a tweet.” She added that she would “take any questions about my financial history seriously” and said she was gathering more information.

    Lowell, her lawyer, said Monday that Mr. Trump didn’t have the legal right to fire Cook “based solely on a referral letter” to Justice Department leadership, a point her legal team reiterated in Thursday’s lawsuit.

    “[R]emoval ‘for cause’ requires some connection to official conduct, prohibiting removal based on an unsubstantiated allegation of private misconduct (which in this case allegedly occurred prior to her Senate confirmation),” the complaint said. “And even to the extent that private misconduct could bear on a particular officer’s official conduct in certain cases, ’cause’ requires a factual basis supporting such asserted misconduct.”

    The broadside against Cook came as Mr. Trump pressures the Fed to lower interest rates. The central bank’s rate-setting committee — which Cook and Powell both sit on — has opted to leave interest rates relatively high so far this year, fearing that inflation could resurge. Last week, Powell hinted that the central bank may cut rates soon, but it will “proceed carefully.”

    The president favors immediate rate cuts, which could boost economic growth and make it cheaper to borrow money, though at the risk of causing higher inflation. He has floated firing Powell at various times over the past few months and has encouraged other Fed officials to overrule him and slash rates.

    The Fed typically makes interest rate decisions independently. Mr. Trump is hardly the first president to criticize the Fed for leaving rates high, but he’s been unusually assertive. Last year, he argued he should have “at least [a] say” in the moves made by the central bank.

    Many experts believe it’s important for central banks to operate independently so they can make decisions based on economic data, not politics. If elected officials are in charge of monetary policy, they could opt for the politically popular short-term benefits of low interest rates — like a hotter economy and cheaper borrowing costs — even if that leads to higher inflation in the long run, Brookings Institution senior fellow David Wessel noted earlier this year.

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    Everything we know about the Minneapolis Catholic school shooting so far

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  • Trading Day: Nvidia beats but shares retreat

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    By Jamie McGeever

    ORLANDO, Florida (Reuters) -TRADING DAY

    Making sense of the forces driving global markets

    By Jamie McGeever, Markets Columnist

    The S&P 500 hit a record high on Wednesday, as Wall Street rose broadly on expectations the Federal Reserve will lower interest rates next month and on investor confidence that tech giant Nvidia‘s results would deliver another resounding ‘beat’.

    More on that below. In my column today, I look at examples of where the overt politicization of monetary policy has had severe economic and market consequences. And contrary to perceived wisdom, these have not just been in emerging markets.

    If you have more time to read, here are a few articles I recommend to help you make sense of what happened in markets today.

    1. Fed’s credibility is an asset whose decline could becostly 2. The fight for the Fed reaches its decisive moment 3. India hit by U.S. doubling of tariffs, plans to cushionblow 4. Tariff-bolstered U.S. credit rating is still tarnished:Mike Dolan 5. Investors worry Trump‘s Intel deal kicks off era of U.S.industrial policy

    Today’s Key Market Moves

    * STOCKS: S&P 500 hits new high. China’s benchmark indexesslump 1.5% or more. Europe flat, Britain’s FTSE 100 falls for asecond day from Monday’s record high. * SHARES/SECTORS: Nvidia shares fall as much as 5% inextended trade after earnings, despite beating on Q2 revenue andforecasting strong Q3 revenue on robust AI chip demand. * FX: Dollar index gives back gains, ends flat. In G10space, dollar falls most vs Canadian dollar and Norwegian krone. * BONDS: French 30-year yield highest since 2011. U.S.2-year yield falls to 3.62%, lowest since May. 5-year auctiongoes reasonably well. * COMMODITIES: Oil rebounds 1% plus from Tuesday’sselloff. Brent crude futures have now swung 1% or more in nineof the last 10 trading sessions.

    Today’s Talking Points:

    * Wings of a dove

    Investors remain confident that the Fed will cut interest rates next month as the controversy around President Donald Trump’s attempts to fire Fed Governor Lisa Cook persists. Traders are putting a near-90% probability on a move next month, and the 2-year Treasury yield fell to its lowest since May.

    New York Fed President John Williams said rates are probably headed lower, but officials need to see more economic data before deciding if a cut next month is appropriate.

    * Stock rotation

    The S&P 500 clocked a new high on Wednesday, led by the energy and healthcare sectors. As August draws to a close, the rotation into small cap and value stocks from tech and growth stocks shows no sign of reversing.

    The Russell 2000 index has lagged all year but on Wednesday notched a new 2025 high, again outperforming Wall Street’s big three indices. Will this continue next month? Much will depend on the impact of Nvidia’s Q2 results, and expectations of what the Fed will do on September 17.

    * China takes stock

    Chinese stocks have been on a tear, roaring to decade highs earlier this week. But the AI-driven rally sputtered on Wednesday, and the Shanghai Composite slid nearly 2% for its biggest fall since the tariff turmoil of early April.

    It may just be natural profit-taking as month-end looms. But maybe the rally is stretched – Hong Kong’s tech index is up 10% in August and up 60% from the April low, and China’s economy is still not out of its funk: China’s economic surprises index last week fell to its lowest level this year.

    Danger ahead! Five examples of risky central bank politicization

    There is legitimate debate about the actual independence of modern-day central banks, but almost everyone agrees that overt politicization of monetary policy – as we appear to be seeing in the United States – is dangerous. Why is that?

    Central banks are essentially arms of government, and many worked in close conjunction with national Treasuries in response to the Global Financial Crisis and pandemic, so absolute independence is a bit of a myth.

    But what U.S. President Donald Trump is currently doing goes well beyond that. By threatening to fire Chair Jerome Powell, actively trying to sack Governor Lisa Cook, and attempting to fill the Board of Governors with appointees sympathetic to his calls for lower interest rates, he is shattering the Fed’s veneer of operational independence.

    Examples of the naked politicization of monetary policy down the years show that it can, to put it mildly, deliver sub-optimal results – loss of credibility, currency weakness, spiking inflation, rising debt, elevated risk premia, and, potentially, much higher borrowing costs.

    These are certainly far from guaranteed outcomes in the U.S., but they show where excessive political interference in monetary policy can lead.

    TURKEY

    “Erdoganomics”, the unorthodox economic theories and policies of Recep Tayyip Erdogan, who has been President of Turkey since 2014, are a prime example of politicized monetary policy. Erdogan, an avowed “enemy” of interest rates, is on record as saying high interest rates cause inflation and that the way to reduce inflation is therefore to lower borrowing costs.

    He fired or replaced five central bank governors between 2019 and 2024, some for hiking interest rates or refusing to cut them.

    With inflation and interest rates hovering around 20% in late 2021, the central bank succumbed to Erdogan’s pressure and slashed borrowing costs. The result? The currency collapsed and inflation soared above 85%.

    ARGENTINA

    Few central banks in the modern era have so clearly been de facto arms of government as Argentina’s Banco Central de la Republica Argentina. Successive governments have leaned heavily on the BCRA to print money to fund their spending, with predictable results. The country has been in and out of economic crises, and battling high or even hyper-inflation for decades.

    The tenure of a BCRA president tends to be short: there have been 13 BCRA heads this century. And there were seven in the first seven years of Carlos Menem’s Presidency between 1989 and 1996. President Cristina Fernandez de Kirchner also notoriously fired BCRA chief Martin Redrado in 2010 because he opposed her plan to use $6.6 billion in FX reserves to pay down debt.

    INDIA

    Pressure on the Reserve Bank of India has intensified under the government of Prime Minister Narendra Modi. In December 2018 RBI Governor Urjit Patel resigned abruptly after just over two years in the job following months of government pressure to ease lending conditions and allow the government more access to reserves to boost spending ahead of national elections.

    In the months before Patel’s departure, Modi also removed RBI board members and appointed his supporters in their place, unnerving investors. This helped push the rupee to a then-record low against the dollar that October, and annual inflation more than trebled over the following year to nearly 8%.

    JAPAN

    The situation here is a bit different – given that Japanese leaders have often been actively seeking a weaker currency and higher inflation – but the cozy relationship between the government and the Bank of Japan has still arguably had a negative impact on the country’s long-term economic health.

    The Japanese government and central bank have worked almost as one while completing several FX interventions over the years. The ties deepened with the roll out of “Abenomics” in 2012, the economic reforms introduced by Prime Minister Shinzo Abe, that included the ‘three arrows’ of fiscal policy, monetary policy, and structural reform.

    At the heart of Abenomics was unprecedentedly loose monetary policy, even by BOJ standards. The central bank expanded its balance sheet massively – it’s still around six times larger than the Fed’s as a share of GDP – and deployed negative interest rates for years.

    Did it work? Many critics argue not, as growth remained sluggish, inequality rose, and Japan is now hamstrung by the world’s largest public debt load.

    UNITED STATES

    Last is, perhaps surprisingly, the U.S. itself. In the early 1970s, President Richard Nixon pressured then-Fed Chair Arthur Burns to keep monetary policy loose ahead of the 1972 election even though inflationary pressures were building.

    Nixon also reportedly told Burns in 1969, just after he nominated him, that previous Fed chair Bill Martin was always six months “too late” doing anything. “I’m counting on you, Arthur, to keep us out of a recession,” adding: “I know there’s the myth of the autonomous Fed…”

    Burns served as Fed chair for eight years through 1978, during which time inflation exploded and didn’t fully come down until the early 1980s. Many observers consider him to be one of the least successful chairs in the Fed’s history.

    It barely needs saying that the U.S. is unlike any other country. Its economy and capital markets dwarf all others, the dollar is the world’s reserve currency, and its rates and bond markets are the benchmarks for global borrowing costs.

    That means that the magnitude of any market or economic impact from Trump’s political interference could very well be smaller than the ructions of the past. But America’s global heft also means that the worldwide impact of these moves could be much greater.

    What could move markets tomorrow?

    * South Korea interest rate decision * Philippines interest rate decision * Bank of Japan board member Junko Nakagawa speaks * China earnings, including ICBC half-yearly results * Euro zone sentiment indicators (August) * Canada current account (Q2) * U.S. GDP (Q2, second estimate) * U.S. weekly jobless claims * U.S. Treasury auctions $44 bln of 7-year notes * Reaction to Nvidia Q2 results released late Wednesday * U.S. earnings including Dollar General, Best Buy, HP

    Want to receive Trading Day in your inbox every weekday morning? Sign up for my newsletter here.

    Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.

    (By Jamie McGeever; Editing by Nia Williams)

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  • Fed Chair signals upcoming interest rate cuts, stocks skyrocket in response

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    Federal Reserve Chair Jerome Powell gave a speech that sent all three stock indexes soaring. Traders excavated clues of an interest rate coming. Archie Hall, U.S. economics editor for The Economist, joins “The Takeout” to discuss.

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  • Fed Chair Jerome Powell signals path to rate cuts in Jackson Hole speech

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    Federal Reserve Chair Jerome Powell on Friday highlighted twin economic risks of a slowing labor market and rising inflation, but opened the door to rate cuts in a widely anticipated speech at the annual Jackson Hole, Wyoming economic forum.

    “Risks to inflation are tilted to the upside, and risks to employment are to the downside — a challenging situation,” Powell said in his speech. 

    The Fed will “proceed carefully” but the shifting balance of risks “may warrant adjusting our policy stance,” Powell said.

    Powell’s remarks signal the Federal Reserve is likely to cut rates at its Sept. 17 meeting, which would mark the first reduction since December 2024, several economists said in research notes following the speech. Wall Street cheered Powell’s remarks, with the S&P 500 jumping 1.3% in late morning trading. 

    “That’s about as clear cut as Powell can get that he has shifted his view since July and is leaning toward a cut in September,” said Heather Long, chief economist at Navy Federal Credit Union, in an email. “He justifies this change in view by acknowledging the downside risks to employment after the shocking July jobs report.”

    While Powell highlighted the slowdown in the labor market, he also maintained that inflation risks from Mr. Trump’s tariffs remain. The Fed has been closely watching the nation’s inflation rate, which remains stubbornly above the central bank’s 2% annual target and which has inched higher in recent months. 

    Under the Fed’s mandate, the central bank is tasked with keeping both inflation and unemployment low.

    Powell said the tariffs could result in a “one-time shift in the price level,” resulting in a short-term boost to inflation. 

    “Of course, ‘one-time’ does not mean ‘all at once’,” he added. “It will continue to take time for tariff increases to work their way through supply chains and distribution networks. Moreover, tariff rates continue to evolve, potentially prolonging the adjustment process.”

    Powell’s comments come as he faces a range of pressures, including President Trump’s repeated calls for his resignation and conflicting economic signals that could make it tougher for the Fed to fulfill its dual mandate of promoting full employment while keeping inflation in check. 

    When monetary policy makers opted to hold rates steady last month, Powell at that time highlighted the growing economic uncertainty stemming from Mr. Trump’s tariffs, while adding that he believed the economy remained on solid ground. 

    Yet subsequent economic data has pointed to a slowdown. Job growth — a key measure of the economy’s strength — significantly undershot economists’ forecasts, while a large downward revision in May and June payroll gains suggested the labor market was shakier than previously thought. 

    Prior to Powell’s speech, the probability of a rate cut at the Fed’s September meeting stood at about 72%, according to CME FedWatch, which bases its calculations on 30-Day Fed Funds futures prices.

    Aimee Picchi

    Aimee Picchi is the associate managing editor for CBS MoneyWatch, where she covers business and personal finance. She previously worked at Bloomberg News and has written for national news outlets including USA Today and Consumer Reports.

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  • Powell addressing Jackson Hole forum as pressure mounts for interest rate cut

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    Federal Reserve Chair Jerome Powell is preparing to address the annual Jackson Hole, Wyoming, economic forum as the Trump administration pushes for an interest rate cut in September. Bill Watts, a markets editor for MarketWatch, joins CBS News with more.

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  • Monetary policy is not about interest rates, it’s about the money supply

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    The ongoing feud between President Trump and Fed Chairman Jerome Powell centers on interest rates. This tells us more about the near-universal view of what constitutes monetary policy than it does about Trump or Powell. While Trump and Powell might quibble over the proper level for the Fed funds rate, they both think monetary policy is all about interest rates.

    Trump and Powell aren’t alone. Today, central bankers organize monetary policy around the overnight interest rate set on reserves supplied by central banks. Indeed, nearly every central bank these days describes its stance on monetary policy in terms of its policy rate. It’s not surprising, therefore, that most bankers, market analysts, economists, and financial journalists also embrace the view that monetary policy is all about central banks’ policy rates. That’s why markets wait with bated breath before each central bank policy rate decision.

    Why the obsession over interest rates? One reason hinges on the fact that for over the past 30 years or so, macroeconomic models are neo-Keynesian extensions of dynamic stochastic general equilibrium (DSGE) models. These put interest rates front and center. Armed with these models, economists and central bankers believe that monetary policy has its impact on the economy via changes in central banks’ policy rates.

    But that’s not what monetarists, who embrace the quantity theory of money, tell us. Unlike the neo-Keynesian macroeconomic models that exclude money, the quantity theory of money states that national income or nominal GDP is primarily determined by the movements of broad money, not by changes in interest rates.

    As it turns out, the data talk loudly and support the quantity theory of money. They do not support the neo-Keynesian models which are centered on changes in interest rates. Indeed, the correlations between changes in policy rates and changes in real and nominal economic activity are considerably worse than those between rates of change in the quantity of money and nominal GDP. Three recent major episodes support this conclusion.

    The case of Japan

    First, let’s consider the case of Japan between 1996 and 2019. Throughout this period, the Bank of Japan’s (BOJ) overnight policy rate lingered at negligible levels, averaging 0.125%. As a result, most economists concluded that monetary policy in Japan was very “easy”. But monetarists, who focused on Japan’s anemic broad money (M2) growth of only 2.8% per year, concluded that monetary policy was “tight”. Which camp was right?

    Japan’s inflation averaged a de minimis 0.2% per year in the 1996-2019 period. It is clear that the monetarists were correct. By focusing on the BOJ’s overnight policy rate and by ignoring the money supply, most mainstream economists completely misdiagnosed the tenor of Japan’s monetary policy.

    The U.S. between 2010 and 2019

    Second, let’s consider the U.S. between 2010 and 2019. During most of this decade, the Fed funds rate was held down at 0.25%. In addition, the Fed engaged in three episodes of quantitative easing (QE). Many concluded that this amounted to very “easy” monetary conditions. They warned that inflation would result. In fact, broad money growth (M2) remained low and stable at 5.8% per year. In consequence, inflation also remained low, averaging just 1.8% per year between 2010 and 2019. As was the case with Japan, interest rates turned out to be a highly misleading indicator of the stance of monetary policy. The growth in the money supply was a much better guide to economic activity and inflation than the course of the Fed funds rate.

    The case of the pandemic

    Third, let’s once again consider the U.S.

    This time, we will examine the COVID pandemic period (2020-2024). Initially, interest rates were reduced to 0.25%, where they stayed between March 2020 and March 2022. In addition, the Fed conducted large-scale QE purchases. Because this policy mix had not caused inflation in the 2010-2019 period, the consensus of Keynesian economists expected the same results as before. By ignoring money growth, they predicted in 2020 and early 2021 that inflation would remain low. Indeed, some Keynesians predicted outright deflation. The deflationists argued that lockdowns were resulting in “weak aggregate supply,” that slow income growth was producing “weak aggregate demand,” and that unemployment, which reached 14.8% in April 2020, would remain elevated.

    By contrast, monetary economists focused on the explosion of broad money (M2) growth, which averaged 17.3% per year between March 2020 and March 2022. In consequence, they predicted, as early as April 2020, that there would be a substantial inflation.

    As it turned out, the monetarists were right once again. From spring 2021, inflation surged, with the U.S. CPI peaking at 9.1% in June 2022, and averaging 7.0% year-on-year between April 2021 and December 2022.

    Why are the monetarists consistently correct?

    In each of the major cases we present, the quantity theory of money generated the correct forecast, while the Keynesian theories, which are based on interest rates, resulted in misleading signals. Why?

    The reason why central bank policy rates are a misguided mechanism for steering and forecasting the course of the economy is because interest rates are, in large part, symptoms of past money growth, not necessarily drivers of future money growth. Changes in the quantity of money, on the other hand, directly fuel spending, and therefore correctly signal the direction of spending and inflation.

    When the quantity of money is increased substantially and for a sustained period, one of the first effects is that interest rates fall. But after six to nine months, business and consumer spending accelerate, and the demand for credit starts to increase. As a result, interest rates are pushed up. If the acceleration of money growth continues, inflation follows – typically after a year or so – and interest rates rise even further.

    So, the first effect of faster money growth is lower interest rates, but this is only a temporary effect. The second and more permanent effect is higher interest rates. This is what happened in the U.S. during the 2020-2024 period.

    Conversely, the first and temporary effect of slower money growth is higher interest rates. The second and more permanent effect is lower interest rates. This is what occurred in Japan between the mid-1990s and 2019.

    By ignoring the quantity theory of money and employing neo-Keynesian macroeconomic models, central bankers are often wrong-footed. They think that by managing policy rates, they are controlling monetary policy when in reality, they are just reacting to changes in the quantity of money that occurred in a prior period.

    For example, the Fed refused to raise rates in 2020 or 2021, asserting that inflation was “transitory”. The Fed only reluctantly started to raise rates in mid-2022. But the excess money creation the Fed had engineered in 2020-2021 generated inflation that peaked at 9.1% per year and forced the Fed to raise rates to 5.5%. If the Fed had refrained from letting the money supply surge in 2020-2021, the steep rate hikes would not have been needed, as evidenced by the experience of China and Switzerland, countries that did not allow excess money growth to occur during the COVID pandemic.

    Monetary policy’s Holy Grail is money, not interest rates.

    The opinions expressed in Fortune.com commentary pieces are solely the views of their authors and do not necessarily reflect the opinions and beliefs of Fortune.

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    Steve H. Hanke, John Greenwood

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  • Fed Chair Jerome Powell faces delicate balancing act in Jackson Hole speech on Friday

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    When Federal Reserve Chairman Jerome Powell takes the stage Friday at the annual Jackson Hole, Wyoming, economic forum, he will face pressures ranging from President Trump’s repeated calls for his resignation to a recent mix of worrying economic data. 

    Powell, whose term as Fed chair ends in May of 2026, will likely be making his last major speech as the central bank’s leader at the event, which is hosted by the Federal Reserve Bank of Kansas City. The symposium is closely watched by investors and economists because it provides a stage for Fed officials to share their views on the economy and the direction of monetary policy.  

    A focal point in Jackson Hole will be if Powell offers any hints about the Fed’s next interest-rate decision, scheduled for Sept. 17. Mr. Trump has badgered the Fed to cut rates, pointing to solid U.S. economic data and muted inflation. Powell has mostly shrugged off that pressure, emphasizing that the central bank is taking a “wait and see” approach as it monitors the potential impact of the Trump administration’s tariffs on consumer prices. 

    Yet Powell also faces a complicated economic picture, with recent signals pointing to a slowdown in job growth and one gauge of inflation registering its largest increase in three years.

    “You have this political pressure balanced off against the economic pressure, which makes Powell’s job particularly difficult, and it’s driving a hyper-focus on what he might say on Friday,” Melissa Brown, managing director of investment decision research at SimCorp, told CBS MoneyWatch.

    The Federal Reserve declined to comment ahead of Powell’s speech at the Jackson Hole symposium, whose theme this year is “Labor Markets in Transition: Demographics, Productivity, and Macroeconomic Policy.”

    The Kansas City Fed will broadcast Powell’s speech on its YouTube channel on Friday at 10 a.m. Eastern Time.

    To cut or not to cut?

    While Powell is likely to discuss economic trends in Jackson Hole, he is virtually certain to demur on the question of when the Federal Open Market Committee, the central bank’s 12-person interest rate-setting panel, might choose to lower its benchmark rate. 

    That is by design. Fed officials famously keep monetary policy decisions — which are set deliberatively and by consensus — private before they are officially announced to avoid roiling financial markets and to insulate the central bank from political pressure. 

    Meanwhile, policy makers will have a chance to assess several major pieces of economic data before their Sept. 16-17 meeting, including the Labor Department’s monthly jobs report on Sept. 5 and the Consumer Price Index on Sept. 11. 

    The head of the labor statistics bureau was fired in August after the agency’s latest employment figures showed a sharp slowdown in job-creation, prompting Mr. Trump to question the accuracy of the data. For now, the August payrolls and CPI reports remain on the Labor Department’s calendar of scheduled releases. 

    “I don’t think Powell can push the narrative toward cutting because that leaves him no option but to cut,” said Mike Sanders, head of fixed income at investment management firm Madison Investments. 

    “He has to signal, ‘We’re still data-dependent and we’ll see what the data tells us’” so the Fed doesn’t get pushed into a corner, Sanders added.

    For their part, investors are clearly placing their bets on the Fed lowering rates in September for the first time since December 2024. Wall Street economists put the likelihood of a cut at 88%, according to financial data company FactSet, with  most expecting a 0.25 percentage-point dip.  

    At last year’s Jackson Hole event, Powell signaled that interest-rate cuts were coming after the central bank had previously raised its benchmark rate to its highest level in 23 years in trying to extinguish inflation. The following month, the Fed announced a jumbo cut 0.50 percentage points in a move to boost economic growth. 

    Dueling mandates

    This year, Powell could similarly use his platform in Wyoming to indicate his openness to a rate cut, according to Will Denyer, chief U.S. economist at Gavekal Research. At the same time, the Fed is also “in a pickle,” given troubling jobs data and signs that inflation could be creeping higher, he said in a report this week.

    That speaks to the Fed’s so-called dual mandate, which is to both maximize employment and minimize inflation. Balancing those two goals can require different — and sometimes conflicting — policies, as lowering interest rates can boost job growth while causing inflation to tick higher, and vice versa.

    “Data alone suggests a rising risk of a stagflationary scenario, which is, you know, a Fed nightmare,” Denyer said. “That puts them in a bind between their two mandates being in conflict.”

    Minutes for the Fed’s July 30 rate decision meeting, when the FOMC again chose to hold rates steady, show that some members “remained worried that supply-chain disruptions could cause inflation to remain stubbornly elevated,” signaling that price increases remain top of mind, noted Oxford Economics chief U.S. economist Ryan Sweet in a report on Wednesday

    “The labor market will be the swing factor on whether the Fed cuts interest rates in September or not,” he added.

    Aimee Picchi

    Aimee Picchi is the associate managing editor for CBS MoneyWatch, where she covers business and personal finance. She previously worked at Bloomberg News and has written for national news outlets including USA Today and Consumer Reports.

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  • Inflation fell to 1.7% in July – MoneySense

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    The annual rate of inflation fell to 1.7% in July, Statistics Canada said Tuesday (Aug. 19), down from 1.9% in June. The reading was a tenth of a percentage point below most economists’ expectations.

    A 16.1% decline year-over-year in gas prices tied mainly to the removal of the consumer carbon price earlier this year fuelled the drop.

    BMO chief economist Doug Porter said in an interview that the July consumer price index was a “relatively favourable report” despite some stubbornness at the grocery store and in housing.

    Economists split on how July inflation may affect BoC’s next rate decision

    July’s consumer price index marks the first of two looks at inflation that the Bank of Canada will get before its next interest rate decision on Sept. 17. The central bank held its policy rate steady at 2.75% in July.

    The Bank of Canada has been looking for signs of how Canada’s tariff dispute is affecting inflation, and is particularly concerned with trends in core inflation that strip out influences from tax changes and other volatile inputs.

    Statistics Canada said the Bank of Canada’s preferred measures of core inflation held around 3% in July.

    Porter pointed out that another measure of core inflation that strips out influences from food and energy was lower in July, around 2.6%. Looking at those readings, he said the July CPI report “slightly turned the dial” toward a rate cut in September, aligning with BMO’s expectations.

    Financial market odds for a quarter-point rate cut in September increased modestly to around 40% as of Tuesday afternoon, according to LSEG Data & Analytics.

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    But with core inflation still elevated compared with the headline figure, Porter acknowledged BMO’s call for a cut next month was “a long shot” at this point. “We need some help in the inflation numbers. We probably need a relatively sluggish jobs number as well,” he said.

    CIBC senior economist Andrew Grantham said in a note that the lack of easing in core inflation can mostly be attributed to the base-year effect—the distortion from price movements last year on a particular month’s annual inflation comparisons. He said the shorter-term, three-month core inflation readings now show an annualized rate of 2.4% for July.

    Grantham said there’s still more data to come before the Bank of Canada’s next rate decision, but the July inflation figures support his call for a quarter-point cut in September.

    RBC, meanwhile, is maintaining its call for no more interest rate cuts from the Bank of Canada this year. Claire Fan, senior economist with RBC, said in a note that the monthly advance in core inflation was less than she was expecting. But she said pressure is still spread broadly through the consumer price index.

    What contributed to July’s inflation rate?

    Inflation on food from the grocery store accelerated to 3.4% annually in July, up from 2.8% in June.

    Confectionary prices rose 11.8% and coffee gained 28.6% to be among the biggest contributors to food inflation last month. Statistics Canada said poor growing conditions in countries that produce cocoa and coffee beans were to blame for higher costs.

    Prices for fresh grapes were up nearly 30%, driving the overall cost for fresh fruit up 3.9% in July compared with 2.1% in June.

    Porter said there are some hints that Canada’s tariff dispute with the United States is a factor keeping food inflation elevated, but he stopped short of blaming it for pain at the grocery store. “I think the bigger story is coffee prices … chocolate prices and beef prices, and those aren’t really a tariff story. Those are more climate issues,” he said.

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    The Canadian Press

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  • The Fed’s Refusal To Cut Interest Rates Is Costing Americans

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    It’s not every week that sees a Federal Reserve development set to shape America for years to come. But two such developments recently occurred two days apart: On July 30, the Fed’s board decided to hold interest rates at their current level, and on Aug. 1, board governor Adriana Kugler resigned.

    In its latest Federal Open Market Committee meeting, the Fed overruled the objections of two dissenting governors, Christopher Waller and Michelle Bowman (who favored a 0.25% interest rate cut).

    Instead, it decided to maintain the target range for the federal funds rate at between 4.25% and 4.50%.

    That marks both the fifth consecutive meeting without a rate change and the most governor dissents since 1993.

    The Federal Open Market Committee cites concerns of rising inflation and long-term ambiguity around tariffs as the reason for leaving the target interest rate unchanged.

    The Fed is employing the “wait-and-see” approach before committing to a rate reduction, hoping that two more rounds of monthly job and inflation data will assist in its decision. Fed Reserve Chairman Jerome Powell claims he “remains focused on achieving [the Fed’s] dual mandate goals of maximum employment and stable prices for the benefit of the American people.”

    Yet Powell simultaneously points to tariff-driven market uncertainty and strong national economic performance as excuses for inaction. These contradictory justifications, coupled with the Fed’s decision to lower interest rates immediately prior to the 2024 election, suggest this might be a political decision, not an economic one.

    In his press conference address, Powell referenced several indicators of economic resilience: business investment increase, payroll job gains, low unemployment, wage growth, and reduced inflation. That’s an environment Donald Trump administration’s policies created in just seven short months, even in spite of the Fed’s refusal to lower rates.

    While annual inflation has steadily decreased, as of June, it continued to run above the 2% objective—hitting 2.7%. The high inflation of the Joe Biden era still has lingering effects on Americans who experience decreased purchasing power, making everyday essentials like groceries and gas more expensive.

    Trump claims that by keeping interest rates high, the Fed is “hurting people” and preventing Americans “from buying houses”—but the Federal Reserve has consistently resisted pressure to cut rates.

    This inaction has sparked debates regarding the Fed’s dominance and its future role, if any, in the U.S. economic system. Now congressmen, economists, and American citizens are all calling on the Trump administration to audit the Fed and eliminate its role in determining interest rates.

    Such calls find further support from the fact that, while the U.S. has seen positive changes in many economic indicators, others still show room for improvement. As Powell explains, “GDP has moderated, activity in the housing sector remains weak, and [Personal Consumption Expenditure] PCE prices rose 2.5% over the last 12 months ending in June.”

    Due to Bidenflation, housing affordability and availability have become increasingly important political issues. The housing market is currently characterized by high costs and high mortgage interest rates.

    However, as the federal government continues to run massive deficits now and deep into the future, pressures for both inflation and interest rates to climb even higher will only intensify.

    By maintaining the current federal funds rate, the Federal Open Market Committee perpetuates its current policy of passing the costs of the federal deficit on to the American public through higher borrowing costs for mortgages, credit cards, and small business and other loans.

    For prospective homebuyers, this can prevent them from achieving the American dream. For businesses, this can limit expansion and hiring—thus leading to slowed innovation and job creation.

    If the Fed were to reduce interest rates by just 25 basis points, mortgages would become more affordable, and competition among buyers would intensify.

    Lower target interest rates would reduce mortgage and business loan rates, making housing more affordable for Americans and incentivizing businesses to provide well-paying job opportunities.

    This would revive housing demand, bringing buyers back into the market, thus easing the housing affordability crisis.

    Not only that, but this interest rate reduction would decrease the cost of servicing the national debt.

    Despite the Fed’s decision to hold rates constant and Chairman Powell’s ambiguity about the future, economists predict a 25-basis-point cut at the Federal Open Market Committee’s September meeting.

    This prediction partly stems from the latest jobs report, which seems to indicate a slowing economic growth.

    That’s earned Powell the moniker “too late Powell” from Trump, who decries the chief’s reluctance to adjust interest rates.

    The same day that jobs report was released, Kugler, a 2023 Biden appointee, suddenly resigned her governor position (effective Aug. 8) without saying why.

    This vacancy offers Trump the chance to appoint a replacement, pending Senate confirmation, with monetary policy views that align closer to his values of low interest rates and low inflation.

    While it might be “too late” to lower interest rates for the August cycle, a newly appointed board member could give Trump another chance to advocate for Federal Reserve transparency and offer Americans more hope for a stable and robust economy.

    Syndicated with permission from The Daily Signal.

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    The Daily Signal

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  • Canada’s economy news: Are we growing enough? – MoneySense

    Canada’s economy news: Are we growing enough? – MoneySense

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    What is slowing Canada’s economy down? What’s growing?

    The manufacturing sector was the largest drag on the economy, followed by utilities, wholesale and trade and transportation and warehousing. The Stats Can report noted shutdowns at Canada’s two largest railways contributed to a decline in transportation and warehousing.

    A preliminary estimate for September suggests real gross domestic product grew by 0.3%.

    Statistics Canada’s estimate for the third quarter is weaker than the Bank of Canada’s projection of 1.5% annualized growth.

    Are there more Bank of Canada rate cuts to come?

    The latest economic figures suggest ongoing weakness in the Canadian economy, giving the central bank room to continue cutting interest rates. But the size of that cut is still uncertain, with lots more data to come on inflation and the economy before the Bank of Canada’s next rate decision on Dec. 11.

    “We don’t think this will ring any alarm bells for the (Bank of Canada) but it puts more emphasis on their fears around a weakening economy,” TD economist Marc Ercolao wrote.

    The central bank has acknowledged repeatedly the economy is weak and that growth needs to pick back up. Last week, the Bank of Canada delivered a half-percentage point interest rate cut in response to inflation returning to its 2% target.

    Governor Tiff Macklem wouldn’t say whether the central bank will follow up with another jumbo cut in December and instead said the central bank will take interest rate decisions one a time based on incoming economic data.

    The central bank is expecting economic growth to rebound next year as rate cuts filter through the economy.

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    The Canadian Press

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  • Why bond yields are rising and what stock investors should do about that

    Why bond yields are rising and what stock investors should do about that

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    Cars drive past the Federal Reserve building on September 17, 2024 in Washington, DC.

    Anna Moneymaker | Getty Images News | Getty Images

    Bond traders are at it again, pushing Treasury yields higher and signaling the Federal Reserve was too heavy-handed when it cut interest rates by a half-percentage point last month. The recently rising yields have put pressure on the stock market — and specifically, names in our portfolio tied to housing.

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  • The Canadian mortgage stress test, explained

    The Canadian mortgage stress test, explained

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    In 2018, the stress test was expanded to include buyers with more than a 20% down payment (those with uninsured mortgages). Since then, all Canadian home buyers applying through a federally regulated lender—as well as those refinancing their current mortgage—have been required to pass the test.

    Has the stress test changed over the years?

    Yes. The stress test has evolved in a couple of ways, including changes to the qualifying rate itself, and how the rate is applied.

    Until June 2021, the stress test rate was set at either 2% above the contract rate that buyers negotiated with their lender, or at the posted Bank of Canada (BoC) five-year rate, whichever was higher. However, when the BoC slashed rates at the onset of the COVID-19 pandemic, there were concerns that its five-year benchmark rate was too low to adequately protect borrowers from defaulting on their mortgages in the future.

    So, the Office of the Superintendent of Financial Institutions (OSFI), a federal government agency that acts as Canada’s banking watchdog, decided to decouple the minimum qualifying stress test rate from the central bank’s rates, and instead use a set floor rate that is reviewed annually.

    Another change has to do with mortgage renewals. Previously, if borrowers wanted to move their mortgage to a different federally regulated lender at renewal, they needed to “pass” the stress test again as a new applicant. In late 2023, however, the federal government eliminated that requirement on insured or high-ratio mortgages, as part of the Canadian Mortgage Charter. And as of Nov. 21, 2024, borrowers with uninsured mortgages will also be able to switch lenders at renewal and qualify based on market interest rates, rather than the stress tested rate.

    “This is a very good thing,” says Crawford. “Borrowers will be able to qualify at the contract rate, which means they can shop around at renewal instead of just accepting whatever their current lender is offering.”

    It’s important to note, however, that borrowers who are refinancing their mortgage—meaning, they want to change the terms of their mortgage contract, say, to extend the amortization period or to borrow extra money against the home’s equity—must pass the stress test again with either their current lender or a new one.

    What does the stress test mean for borrowers?

    The stress test reduces the size of mortgage that buyers can qualify for, says Crawford. So, unless you are able to come up with a bigger down payment to make up the difference, the test also lowers your maximum purchase price. 

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    Tamar Satov

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  • The Canadian mortgage stress test, explained

    The Canadian mortgage stress test, explained

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    “The stress test was introduced to add a margin of safety to ensure borrowers could make their payments if they faced a change in circumstances—such as if interest rates go up or their income changes,” says Crawford. 

    In 2018, the stress test was expanded to include buyers with more than a 20% down payment (those with uninsured mortgages). Since then, all Canadian home buyers applying through a federally regulated lender—as well as those refinancing their current mortgage—have been required to pass the test.

    Has the stress test changed over the years?

    Yes. The stress test has evolved in a couple of ways, including changes to the qualifying rate itself, and how the rate is applied.

    Until June 2021, the stress test rate was set at either 2% above the contract rate that buyers negotiated with their lender, or at the posted Bank of Canada (BoC) five-year rate, whichever was higher. However, when the BoC slashed rates at the onset of the COVID-19 pandemic, there were concerns that its five-year benchmark rate was too low to adequately protect borrowers from defaulting on their mortgages in the future.

    So, the Office of the Superintendent of Financial Institutions (OSFI), a federal government agency that acts as Canada’s banking watchdog, decided to decouple the minimum qualifying stress test rate from the central bank’s rates, and instead use a set floor rate that is reviewed annually.

    Another change has to do with mortgage renewals. Previously, if borrowers wanted to move their mortgage to a different federally regulated lender at renewal, they needed to “pass” the stress test again as a new applicant. In late 2023, however, the federal government eliminated that requirement on insured or high-ratio mortgages, as part of the Canadian Mortgage Charter. And as of Nov. 21, 2024, borrowers with uninsured mortgages will also be able to switch lenders at renewal and qualify based on market interest rates, rather than the stress tested rate.

    “This is a very good thing,” says Crawford. “Borrowers will be able to qualify at the contract rate, which means they can shop around at renewal instead of just accepting whatever their current lender is offering.”

    It’s important to note, however, that borrowers who are refinancing their mortgage—meaning, they want to change the terms of their mortgage contract, say, to extend the amortization period or to borrow extra money against the home’s equity—must pass the stress test again with either their current lender or a new one.

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    Tamar Satov

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