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Gil Borok, Colliers U.S. and Latin America CEO, joins ‘Money Movers’ to discuss if Borok thinks rate cuts mark the peak in commercial real estate delinquencies, how the chief executive sees the current environment, and much more.
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Tag: Interest Rates
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Bank margins should ‘open up’ as Fed begins rate cuts, says RBC’s Gerard Cassidy
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Gerard Cassidy, RBC Capital Markets managing director, joins ‘Squawk on the Street’ to discuss the impact of rate cuts on banks, what will happen with loan demand, and more.
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CNBC Daily Open: One day makes all the difference
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[ad_2]A worker sweeps the floor at the Nasdaq MarketSite in New York, US, on Monday, Sept. 16, 2024.
Yuki Iwamura | Bloomberg | Getty Images
This report is from today’s CNBC Daily Open, our international markets newsletter. CNBC Daily Open brings investors up to speed on everything they need to know, no matter where they are. Like what you see? You can subscribe here.
What you need to know today
New highs
U.S. stocks rallied on Thursday, as all major indexes closed in the green. The S&P 500 and Dow Jones Industrial Average marked new record closes, while the tech-heavy Nasdaq Composite had its fourth-best day this year, fueled by a rally in tech. The regional Europe Stoxx 600 index rose 1.38%, with all major bourses and most sectors ending the day higher.Tech surges
After taking a day to digest the U.S. Federal Reserve’s rate cut, investors flocked to tech stocks. On Thursday, Tesla soared 7.4%, Nvidia popped 4% and Apple jumped 3.7%. Lifted by those stocks, the Nasdaq rose 2.5%, its fourth-biggest single-day gain in 2024. Its sharpest rally this year was a 3% increase on Feb. 22.“Recalibration”
Fed Chair Jerome Powell’s use of the word “recalibration” seemed to reassure investors that the central bank’s 50 basis point cut wasn’t that worrying. It signaled the Fed wasn’t responding to a slowing economy, but shifting focus to ensuring employment doesn’t dip further, wrote CNBC’s Jeff Cox.Staying its hand
The Bank of England decided to hold interest rates steady at 5%. The decision was nearly unanimous: Only one out of nine members in the Monetary Policy Committee voted to reduce rates by a quarter percentage point. Market watchers expect the BOE to cut rates at its next meeting in November.[PRO] Another big cut?
Some experts thought the Fed would lower rates by a quarter percentage point at its September meeting. That call was wrong. A JPMorgan Chase economist nailed the half-point call – and he sees another big rate cut in November.The bottom line
“Twenty-four little hours / Brought the sun and the flowers / Where there used to be rain,” sings American 1950s star Dinah Washington.
Washington might as well be singing about the market’s behavior. Immediately after the Fed announced the jumbo rate slash on Wednesday, stocks hit fresh highs before falling into the red by the end of that day.
But twenty-four hours later, after investors assessed that the half-point cut probably didn’t portend the start of a recession, major indexes rallied to close at record highs.
The S&P climbed 1.7% to end at 5,713.64, the first time the broad-based index has broken through the 5,700 ceiling. Likewise, the Dow closed at 42,025.19, its first above the 42,000 level, after the index rose 1.26%.
The Nasdaq, buoyed by a rally in names like Tesla, Nvidia and Apple, was the biggest winner among major indexes, surging 2.51%, for its fourth-best day this year.
And while history shows that September hasn’t been nice to stocks, it also tells us that when the S&P notches record highs during the month, the fourth quarter’s likely to remain strong. Since 1950, this pattern has played out in 20 out of 22 occasions, noted Oppenheimer.
Indeed, BMO is so bullish about the market that the bank raised its year-end target for the S&P to 6,100 – an 8.6% climb from Wednesday’s close – the highest projection on Wall Street.
“Much like our last target increase in May, we continue to be surprised by the strength of market gains and decided yet again that something more than an incremental adjustment was warranted,” chief investment strategist Brian Belski wrote to clients in a Thursday note.
At the end of Washington’s song, she croons, “What a difference a day makes / And the difference is you.” Powell can perhaps feel like Washington’s serenading him.
– CNBC’s Alex Harring, Fred Imbert, Hakyung Kim and Lisa Kailai Han contributed to this story.
Correction: An earlier version of this report did not state the time frame for the Nasdaq’s best performance. It has been added to this report.
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The Fed’s interest rate cut is an inflection point for real estate markets: Hines
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David Steinbach of Hines discusses the U.S. Federal Reserve’s September interest rate cut and what this means for investor interest in the real estate market.
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The Federal Reserve just cut interest rates by a half point. Here’s what that means for your wallet
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People shop at a grocery store on August 14, 2024 in New York City.
Spencer Platt | Getty Images
The Federal Reserve announced Wednesday it will lower its benchmark rate by a half percentage point, or 50 basis points, paving the way for relief from the high borrowing costs that have hit consumers particularly hard.
The federal funds rate, which is set by the U.S. central bank, is the interest rate at which banks borrow and lend to one another overnight. Although that’s not the rate consumers pay, the Fed’s moves still affect the borrowing and savings rates they see every day.
Wednesday’s cut sets the federal funds rate at a range of 4.75%-5%.
A series of interest rate hikes starting in March 2022 took the central bank’s benchmark to its highest in more than 22 years, which caused most consumer borrowing costs to skyrocket — and put many households under pressure.
Now, with inflation backing down, “there are reasons to be optimistic,” said Greg McBride, chief financial analyst at Bankrate.com.
However, “one rate cut isn’t a panacea for borrowers grappling with high financing costs and has a minimal impact on the overall household budget,” he said. “What will be more significant is the cumulative effect of a series of interest rate cuts over time.”
More from Personal Finance:
The ‘vibecession’ is ending as the economy nails a soft landing
‘Recession pop’ is in: How music hits on economic trends
More Americans are struggling even as inflation cools“There are always winners and losers when there is a change in interest rates,” said Stephen Foerster, professor of finance at Ivey Business School in London, Ontario. “In general, lower rates favor borrowers and hurt lenders and savers.”
“It really depends on whether you are a borrower or saver or whether you currently have locked-in borrowing or savings rates,” he said.
From credit cards and mortgage rates to auto loans and savings accounts, here’s a look at how a Fed rate cut could affect your finances in the months ahead.
Credit cards
Since most credit cards have a variable rate, there’s a direct connection to the Fed’s benchmark. Because of the central bank’s rate hike cycle, the average credit card rate rose from 16.34% in March 2022 to more than 20% today — near an all-time high.
Going forward, annual percentage rates will start to come down, but even then, they will only ease off extremely high levels. With only a few cuts on deck for 2024, APRs would still be around 19% in the months ahead, according to McBride.
“Interest rates took the elevator going up, but they’ll be taking the stairs coming down,” he said.
That makes paying down high-cost credit card debt a top priority since “interest rates won’t fall fast enough to bail you out of a tight situation,” McBride said. “Zero percent balance transfer offers remain a great way to turbocharge your credit card debt repayment efforts.”
Mortgage rates
Although 15- and 30-year mortgage rates are fixed, and tied to Treasury yields and the economy, anyone shopping for a new home has lost considerable purchasing power in the last two years, partly because of inflation and the Fed’s policy moves.
But rates are already significantly lower than where they were just a few months ago. Now, the average rate for a 30-year, fixed-rate mortgage is around 6.3%, according to Bankrate.
Jacob Channel, senior economist at LendingTree, expects mortgage rates will stay somewhere in the 6% to 6.5% range over the coming weeks, with a chance that they’ll even dip below 6%. But it’s unlikely they will return to their pandemic-era lows, he said.
“Though they are falling, mortgage rates nonetheless remain relatively high compared to where they stood through most of the last decade,” he said. “What’s more, home prices remain at or near record highs in many areas.” Despite the Fed’s move, “there are a lot of people who won’t be able to buy until the market becomes cheaper,” Channel said.
Auto loans
Even though auto loans are fixed, higher vehicle prices and high borrowing costs have stretched car buyers “to their financial limits,” according to Jessica Caldwell, Edmunds’ head of insights.
The average rate on a five-year new car loan is now more than 7%, up from 4% when the Fed started raising rates, according to Edmunds. However, rate cuts from the Fed will take some of the edge off the rising cost of financing a car — likely bringing rates below 7% — helped in part by competition between lenders and more incentives in the market.
“Many Americans have been holding off on making vehicle purchases in the hopes that prices and interest rates would come down, or that incentives would make a return,” Caldwell said. “A Fed rate cut wouldn’t necessarily drive all those consumers back into showrooms right away, but it would certainly help nudge holdout car buyers back into more of a spending mood.”
Student loans
Federal student loan rates are also fixed, so most borrowers won’t be immediately affected by a rate cut. However, if you have a private loan, those loans may be fixed or have a variable rate tied to the Treasury bill or other rates, which means once the Fed starts cutting interest rates, the rates on those private student loans will come down over a one- or three-month period, depending on the benchmark, according to higher education expert Mark Kantrowitz.
Eventually, borrowers with existing variable-rate private student loans may be able to refinance into a less expensive fixed-rate loan, he said. But refinancing a federal loan into a private student loan will forgo the safety nets that come with federal loans, such as deferments, forbearances, income-driven repayment and loan forgiveness and discharge options.
Additionally, extending the term of the loan means you ultimately will pay more interest on the balance.
Savings rates
While the central bank has no direct influence on deposit rates, the yields tend to be correlated to changes in the target federal funds rate.
As a result of Fed rate hikes, top-yielding online savings account rates have made significant moves and are now paying more than 5% — the most savers have been able to earn in nearly two decades — up from around 1% in 2022, according to Bankrate.
If you haven’t opened a high-yield savings account or locked in a certificate of deposit yet, you’ve likely already missed the rate peak, according to Matt Schulz, LendingTree’s credit analyst. However, “yields aren’t going to fall off a cliff immediately after the Fed cuts rates,” he said.
Although those rates have likely maxed out, it is still worth your time to make either of those moves now before rates fall even further, he advised.
One-year CDs are now averaging 1.78% but top-yielding CD rates pay more than 5%, according to Bankrate, as good as or better than a high-yield savings account.
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Former Dallas Fed President Kaplan advocates for a half-point interest rate cut
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If Robert Kaplan still had a say in the matter, he’d be pushing for a half percentage point interest rate reduction at this week’s Federal Reserve meeting.
The former Dallas Fed president told CNBC on Tuesday that making the bolder move of 50 basis points would better position policymakers heading into the latter part of the year and the economic challenges ahead.
“If I were sitting at the table, I would be advocating for 50 in this meeting,” Kaplan said during a “Squawk Box” interview. “I think the Fed may be a meeting or so late, and if I had a do-over, I might prefer we had started the cutting in July, not September.”
Markets currently are putting about 2 to 1 odds that the Federal Open Market Committee will approve a 50 basis point reduction, as opposed to the 25 basis point cut it had been pricing in leading up to Friday, according to the CME Group’s FedWatch. One basis point equals 0.01%.
Fed funds, the central bank’s benchmark overnight lending rate, currently stands at 5.25% to 5.50%.
Should the committee decide to make the more aggressive move, Kaplan said it would then be incumbent on Chair Jerome Powell in his post-meeting press conference on Wednesday to indicate that additional cuts ahead are “likely to be more measured.” The Fed’s two-day policy meeting gets underway Tuesday.
“From a risk management point of view, 50 makes the most sense,” Kaplan said. “If the group is split, a lot of this will depend, actually, on what Jay Powell personally thinks, what is his personal disposition on all this, and then his ability to wrangle everybody to a unanimous decision.”
Kaplan ran the Dallas Fed from 2015-21 and is now a managing director at Goldman Sachs.
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The Fed is set to cut rates for the first time in 4 years. What does that mean for your money?
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It’s been a long and bumpy road to the Federal Reserve’s first interest rate cut in more than four years — a moment that could prove decisive to the finances of millions of Americans.
On Wednesday, the Fed is expected to reduce its benchmark rate, which currently stands at its highest point in 23 years, after the central bank introduced a flurry of rate hikes to tame the pandemic’s high inflation. While economists are unanimous in expecting a rate cut on September 18, they’re split between predicting a 0.25 percentage point cut versus a 0.5 percentage point reduction, according to financial data firm FactSet.
Whatever the size of the cut, the Fed’s first rate reduction since March 2020 will provide some welcome relief for consumers who are in the market for a home or auto purchase, as well as for those carrying pricey credit card debt. The decision is also expected to kick off a series of rate reductions later this year and into 2025, which could have lasting implications on mortgage and auto loan rates, but could also have a downside of shaving the relatively high returns recently enjoyed by savers.
“It’s been a long marathon — the Fed feels it’s time to lower interest rates again,” Sara Rathner, co-host of the Smart Money podcast and a personal finance expert for NerdWallet, told CBS MoneyWatch. “Consumers are definitely feeling the pinch. It’s been this one-two punch of higher interest rates and inflation.”
Wednesday’s rate cut will “present an opportunity for consumers to take a look at their finances and save money on some of their borrowing,” she said.
When is the Fed’s September 2024 meeting?
The Fed’s September 2024 meeting will be held from September 17-18, with the central bank scheduled to announce its rate decision at 2 p.m. Eastern time on September 18.
That will be followed by a press conference with Fed Chair Jerome Powell at 2:30 p.m. E.T., where Powell will discuss the central bank’s economic outlook.
Powell has recently signaled the central bank is ready to reduce its benchmark rate, noting at an August speech that “the time has come” for the Fed to adjust its monetary policy after inflation dropped below 3% on an annual basis and amid some signs of weakness in the labor market.
What size of rate cut is expected?
That’s the big debate among economists, with some predicting that the Fed will shave its benchmark rate by 0.25 percentage points — the Fed’s standard reduction — while others are predicting a jumbo cut of 0.5 percentage points.
Regardless of the size, the rate cut will provide some relief to borrowers, albeit at a relatively small dose given that the current Fed funds’ target stands in a range of 5.25% to 5.5%. A reduction of 0.25 percentage points, for instance, would take the target range down to 5% to 5.25%, providing only a small reduction in borrowing costs.
“By itself, one rate cut isn’t a panacea for borrowers grappling with high financing costs and has a minimal impact on the overall household budget,” noted Greg McBride, chief financial analyst at Bankrate, in an email. “What will be more significant is the cumulative effect of a series of interest rate cuts over time.”
Will the Fed cut rates later in 2024?
Yes, economists polled by FactSet are predicting rate cuts at the Fed’s November and December meetings —there is no October rate decision meeting. Additionally, many economists expect the Fed to continue to cut throughout 2025, with most forecasting that, by May 2025, the benchmark rate will stand between 3% to 3.5%, according to FactSet.
“Our baseline forecast is for three consecutive 25bp cuts in September, November and December, and an eventual terminal rate of 3.25%-3.5%,” Goldman Sachs analysts wrote in a September 15 research note.
How will the rate cut impact mortgage rates?
Mortgage rates have surged alongside the Fed’s hikes, with the 30-year fixed-rate loan topping 7% in 2023 as well as earlier this year. That placed homebuying out of financial reach for many would-be buyers, especially as home prices continue to climb.
Already, mortgage rates have slid ahead of the September 18 rate decision, partly due to anticipation of a cut as well as weaker economic data. The 30-year fixed-rate mortgage currently sits at about 6.29%, the lowest rate since February 2023, according to the Mortgage Bankers Association.
But the September 18 rate cut may not result in a significant additional drop in rates, especially if the economy remains relatively strong, Orphe Divounguy, senior economist at Zillow, told CBS MoneyWatch.
“We expect mortgage rates to end the year kind of roughly where they are now,” he said.
Even so, this could prove to be the right time for recently sidelined homebuyers to enter the market, Divounguy added. That’s because housing affordability is improving while inventory is scaling back up after a dip in 2022, providing buyers with more choices.
Some homeowners with mortgages of more than 7% may also want to consider refinancing into a lower rate, experts said. For instance, a homeowner with a $400,000 mortgage could save about $400 a month by refinancing into a loan at today’s rate of about 6.3% versus the peak of about 7.8% in 2023.
“Generally, lenders would recommend refinancing when it’s a difference of 1 percentage point or more,” noted Smart Money’s Rathner.
What about auto loans, credit cards and other debt?
Auto loan rates are likely to see reductions after the rate cut, experts said. And that could convince some consumers to start shopping around for a vehicle according to Edmunds, which found that about 6 in 10 car shoppers have held off on buying because of high rates.
Currently, the average APR on a loan for a new car is 7.1%, and 11.3% for a used car, according to Edmunds.
“A Fed rate cut wouldn’t necessarily drive all those consumers back into showrooms right away, but it would certainly help nudge holdout car buyers back into more of a spending mood, especially coupled with some of the advertising messages that automakers typically push during Black Friday and through the end of the year,” said Jessica Caldwell, Edmunds’ head of insights, in an email.
Likewise, credit card rates, which have been at historic highs, are likely to follow the rate cut, but this probably won’t make much of a difference for people carrying balances, said LendingTree credit analyst Matt Schulz. He calculates that someone with a $5,000 balance and a card with a 24.92% APR could save less than $1 a month on interest if their APR is reduced by one-quarter percentage point.
A better bet, experts say, is to pay down the debt, if possible, or look for a zero-percent balance transfer card or a personal loan, which typically carries a lower rate than credit cards.
How will a Fed cut impact savings accounts and CDs?
If rate hikes have a silver lining, it’s that savers have enjoyed high rates on certificate of deposits (CDs) and high-yield savings accounts. Some banks have offered APYs as high as 5%, giving Americans a chance to juice their savings accounts.
But that may be finally coming to a close, Schulz noted.
There’s still time for people to take advantage of relatively high rates, even if they slide slightly in the coming months, he added. “I don’t think anybody should expect rates to fall off a cliff immediately,” he said.
Still, some experts have predicted that the top savings accounts could see rates drop by as much as 0.75 percentage points after the Fed cuts rates. Even so, consumers can still benefit by moving money from a traditional savings account into a high-yield savings account, which can help them build up an emergency fund or bolster their savings with higher returns.
As for CDs, Schulz recommends people lock in rates now, if they can. “Rates are already starting to come down, and they’re only going to continue to come down,” he said.
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Borrowing from your HELOC to invest in equities – MoneySense
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Borrowing to invest can be risky. It can magnify your returns, as well as your losses. The best candidate for leveraged investing is someone with a high risk tolerance, a long time horizon and low investment fees.
Leveraged investing for the short term can be risky, because stock prices can fall several years in a row, even if they rise most of the time.
If you’re a balanced investor buying stocks and bonds, particularly if you pay high investment fees, it can be hard to earn a profit over and above the interest costs.
Borrowing to invest
You can deduct interest on money that you borrow for investment purposes if the investments are taxable. So, you cannot deduct interest on money borrowed to invest in a registered retirement savings plan (RRSP) or tax-free savings account (TFSA).
When you borrow money to invest in stocks, you can deduct the interest on line 22100 of your personal T1 tax return. You can also deduct other expenses or carrying charges on this line, such as fees for investment management or for certain investment advice, or accounting fees if you have income from a business or property.
If your investments produce only capital gains, you cannot deduct your interest. If you are in Quebec, you may be limited provincially from deducting interest that exceeds your investment income for the year.
What is a HELOC?
HELOC stands for home equity line of credit, a type of loan secured by your home—meaning that your home is collateral for the loan. HELOCs provide revolving credit, so you can borrow money as you need it, up to a certain amount—usually a percentage of the value of your home. Most HELOCS have no fixed repayment schedule, although you will have to pay interest monthly. In contrast, a home equity loan is a lump sum with a fixed repayment schedule for the full amount.
Read the full definition in the MoneySense Glossary: What is a HELOC?
HELOC vs. mortgage
You mentioned you borrowed using a home equity line of credit (HELOC), Jackie. Most HELOCs have interest-only payments, so that ensures your payments are all tax-deductible when you borrow to invest in eligible investments. However, HELOCs tend to have higher interest rates than mortgages.
A typical HELOC rate is the prime rate, plus 0.5% or 1%, whereas a variable-rate mortgage may have a discount to the prime rate of 0.5% to 1%. It may make sense to consider converting a tax-deductible HELOC to a mortgage to reduce your cost of borrowing. This would increase your payments, since mortgage payments include principal and interest, so it might slightly increase your cash-flow requirement. However, paying lower interest may make the leverage more beneficial overall.
Can you port a HELOC?
If you are moving to a new home that you are buying, Jackie, you could consider porting your HELOC to the new property. This way, the debt can be preserved, as well as the tax deductibility.
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Jason Heath, CFP
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It’s a big week for central banks around the world, with a slew of rate moves on the table
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Federal Reserve Chair Jerome Powell announces interest rates will remain unchanged during a news conference at the Federal Reserves’ William McChesney Martin Building in Washington, D.C., on June 12, 2024.
Kevin Dietsch | Getty Images
A flurry of major central banks will hold monetary policy meetings this week, with investors bracing for interest rate moves in either direction.
The Federal Reserve’s highly anticipated two-day meeting, which gets underway on Tuesday, is poised to take center stage.
The U.S. central bank is widely expected to join others around the world in starting its own rate-cutting cycle. The only remaining question appears to be by how much the Fed will reduce rates.
Traders currently see a quarter-point cut as the most likely outcome, although as many as 41% anticipate a half-point move, according to the CME’s FedWatch Tool.
Elsewhere, Brazil’s central bank is scheduled to hold its next policy meeting across Tuesday and Wednesday. The Bank of England, Norway’s Norges Bank and South Africa’s Reserve Bank will all follow on Thursday.
A busy week of central bank meetings will be rounded off when the Bank of Japan delivers its latest rate decision at the conclusion of its two-day meeting on Friday.
“We’re entering a cutting phase,” John Bilton, global head of multi-asset strategy at J.P. Morgan Asset Management, told CNBC’s “Squawk Box Europe” on Thursday.
Speaking ahead of the European Central Bank’s most recent quarter-point rate cut, Bilton said the Fed was also set to cut interest rates by 25 basis points this week, with the Bank of England “likely getting in on the party” after the U.K. economy stagnated for a second consecutive month in July.
“We have all the ingredients for the beginning of a fairly extended cutting cycle but one that is probably not associated with a recession — and that’s an unusual set-up,” Bilton told CNBC’s “Squawk Box Europe.”
“It means that we get a lot of volatility to my mind in terms of price discovery around those who believe that actually the Fed [is] late, the ECB [is] late, this is a recession and those, like me, that believe that we don’t have the imbalances in the economy, and this will actually spur further upside.”
Fed decision
Policymakers at the Fed have laid the groundwork for interest rate cuts in recent weeks. Currently, the Fed’s target rate is sitting at 5.25% to 5.5%.
Some economists have argued the Fed should deliver a 50 basis point rate cut in September, accusing the central bank of having previously gone “too far, too fast” with monetary policy tightening.
Others have described such a move as one that would be “very dangerous” for markets, pushing instead for the central bank to deliver a 25 basis point rate cut.
“We are more likely 25 but [would] love to see 50,” David Volpe, deputy chief investment officer at Emerald Asset Management, told CNBC’s “Squawk Box Europe” on Friday.
“And the reason you do 50 next week would be as more or less a safety mechanism. You have seven weeks between next week and … the November meeting, and a lot can happen negatively,” Volpe said.
“So, it would be more of a method of trying to get in front of things. The Fed is caught on their heels a little bit, so we think that it would be good if they got in front of it, did the 50 now, and then made a decision in terms of November and December. Maybe they do 25 at that point in time,” he added.
Brazil and UK
For Brazil’s central bank, which has cut interest rates several times since July last year, stronger-than-anticipated second-quarter economic data is seen as likely to lead to an interest rate hike in September.
“We expect Banco Central to hike the Selic rate by 25bps next week (to 10.75%) and bring it to 11.50% by end-2024,” Wilson Ferrarezi, an economist at TS Lombard, said in a research note published on Sept. 11.
“Further rate hikes into 2025 cannot be ruled out and will depend on the strength of domestic activity in Q4/24,” he added.
Traffic outside the Central Bank of Brazil headquarters in Brasilia, Brazil, on Monday, June 17, 2024.
Bloomberg | Bloomberg | Getty Images
In the U.K., an interest rate cut from the Bank of England (BOE) on Thursday is thought to be unlikely. A Reuters poll, published Friday, found that all 65 economists surveyed expected the BOE to hold rates steady at 5%.
The central bank delivered its first interest rate cut in more than four years at the start of August.
“We have quarterly cuts from here. We don’t think they are going to move next week, with a 7-2 vote,” Ruben Segura Cayuela, head of European economics at the Bank of America, told CNBC’s “Squawk Box Europe” on Friday.
He added that the next BOE rate cut is likely to take place in November.
South Africa, Norway and Japan
South Africa’s Reserve Bank is expected to cut interest rates on Thursday, according to economists surveyed by Reuters. The move would mark the first time it has done so since the central bank’s response to the coronavirus pandemic four years ago.
The Norges Bank is poised to hold its next meeting on Thursday. The Norwegian central bank kept its interest rate unchanged at a 16-year high of 4.5% in mid-August and said at the time that the policy rate “will likely be kept at that level for some time ahead.”
The Bank of Japan, meanwhile, is not expected to raise interest rates at the end of the week, although a majority of economists polled by Reuters expect an increase by year-end.
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Don’t expect ‘immediate relief’ from the Federal Reserve’s first rate cut in years, economist says. Here’s why
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Recent signs of cooling inflation are paving the way for the Federal Reserve to cut rates when it meets next week, which is welcome news for Americans struggling to keep up with the elevated cost of living and sky-high interest charges.
“Consumers should feel good about [an interest rate reduction] but it’s not going to deliver sizable immediate relief,” said Brett House, economics professor at Columbia Business School.
Inflation has been a persistent problem since the Covid-19 pandemic, when price increases soared to their highest levels in more than 40 years. The central bank responded with a series of interest rate hikes that took its benchmark rate to the highest level in decades.
The spike in interest rates caused most consumer borrowing costs to skyrocket, putting many households under pressure.
More from Personal Finance:
The ‘vibecession’ is ending as the economy nails a soft landing
‘Recession pop’ is in: How music hits on economic trends
More Americans are struggling even as inflation cools“The cumulative progress on inflation — evidenced by the CPI now at 2.5% after having peaked at 9% in mid-2022 — has given the Federal Reserve the green light to begin cutting interest rates at next week’s meeting,” said Greg McBride, chief financial analyst at Bankrate.com, referring to the consumer price index, a broad measure of goods and services costs across the U.S. economy.
However, the impact from the first rate cut, expected to be a quarter percentage point, “is very minimal,” McBride said.
“What borrowers can be optimistic about is that we will see a series of rate cuts that cumulatively will have a meaningful impact on borrowing costs, but it will take time,” he said. “One rate cut is not going to be a panacea.”
Markets are pricing in a 100% probability that the Fed will start lowering rates when it meets Sept. 17-18, with the potential for more aggressive moves later in the year, according to the CME Group’s FedWatch measure.
That could bring the Fed’s benchmark federal funds rate from its current range, 5.25% to 5.50%, to below 4% by the end of 2025, according to some experts.
The federal funds rate, which the U.S. central bank sets, is the rate at which banks borrow and lend to one another overnight. Although that’s not the rate consumers pay, the Fed’s moves still affect the borrowing and savings rates they see every day.
Rates for everything from credit cards to car loans to mortgages will be affected once the Fed starts trimming its benchmark. Here’s a breakdown of what to expect:
Credit cards
Since most credit cards have a variable rate, there’s a direct connection to the Fed’s benchmark. In the wake of the rate hike cycle, the average credit card rate rose from 16.34% in March 2022 to more than 20% today — near an all-time high.
For those paying 20% interest — or more — on a revolving balance, annual percentage rates will start to come down when the Fed cuts rates. But even then they will only ease off extremely high levels, according to McBride.
“The Fed has to do a lot of rate cutting just to get to 19%, and that’s still significantly higher than where we were just three years ago,” McBride said.
The best move for those with credit card debt is to switch to a 0% balance transfer credit card and aggressively pay down the balance, he said. “Rates won’t fall fast enough to bail you out.”
Mortgage rates
While 15- and 30-year mortgage rates are fixed and mostly tied to Treasury yields and the economy, they are partly influenced by the Fed’s policy. Home loan rates have already started to fall, largely due to the prospect of a Fed-induced economic slowdown.
As of Sept. 11, the average rate for a 30-year, fixed-rate mortgage was around 6.3%, nearly a full percentage point drop from where rates stood in May, according to the Mortgage Bankers Association.
But even though mortgage rates are falling, home prices remain at or near record highs in many areas, according to Jacob Channel, senior economist at LendingTree.
“This cut isn’t going to totally reshape the economy, and it’s not going to make doing things like buying a house or paying off debt orders of magnitude easier,” he said.
Auto loans
“Auto loan rates will head lower, too, but you shouldn’t expect the blocking and tackling around car shopping to change anytime soon,” said Matt Schulz, chief credit analyst at LendingTree.
The average rate on a five-year new car loan is now around 7.7%, according to Bankrate.
While anyone planning to finance a new car could benefit from lower rates to come, the Fed’s next move will not have any material effect on what you get, said Bankrate’s McBride. “Nobody is upgrading from a compact to an SUV on a quarter-point rate cut.” The quarter percentage point difference on a $35,000 loan is about $4 a month, he said.
Consumers would benefit more from improving their credit scores, which could pave the way to even better loan terms, McBride said.
Student loans
Federal student loan rates are also fixed, so most borrowers won’t be immediately affected by a rate cut. However, if you have a private loan, those loans may be fixed or have a variable rate tied to the T-bill or other rates, which means once the Fed starts cutting interest rates, the rates on those private student loans will come down as well.
Eventually, borrowers with existing variable-rate private student loans may also be able to refinance into a less expensive fixed-rate loan, according to higher education expert Mark Kantrowitz.
However, refinancing a federal loan into a private student loan will forgo the safety nets that come with federal loans, he said, “such as deferments, forbearances, income-driven repayment and loan forgiveness and discharge options.” Additionally, extending the term of the loan means you ultimately will pay more interest on the balance.
Savings rates
While the central bank has no direct influence on deposit rates, the yields tend to be correlated to changes in the target federal funds rate.
As a result of the Fed’s string of rate hikes in recent years, top-yielding online savings account rates have made significant moves and are now paying well over 5%, with no minimum deposit, according to Bankrate’s McBride.
With rate cuts on the horizon, those “deposit rates will come down,” he said. “But the important thing is, what is your return relative to inflation — and that is the good news. You are still earning a return that’s ahead of inflation, as long as you have your money in the right place.”
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CNBC Daily Open: Did Apple’s shiny new things improve market sentiment?
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[ad_2]New models of the Apple iPhone 16 are displayed after Apple’s “It’s Glowtime” event in Cupertino, California, September 9, 2024.
Nic Coury | AFP | Getty Images
This report is from today’s CNBC Daily Open, our international markets newsletter. CNBC Daily Open brings investors up to speed on everything they need to know, no matter where they are. Like what you see? You can subscribe here.
What you need to know today
Broad rebound
U.S. stocks rebounded on Monday after posting huge losses last week. It was a broad rally across assets: Oil prices gained 1% and bitcoin rose 4.42%. Asia-Pacific stocks were mixed Tuesday. The Hang Seng index added 0.42%, with Alibaba shares rising more than 5% after the company was added to Stock Connect. The scheme allows investors in mainland China and Hong Kong to trade and settle shares with each other’s market.Export growth in China
China’s exports in August rose 8.7% year on year, in U.S. dollar terms, beating Reuters’ estimates of a 6.5% rise. Exports to the EU grew 13% from a year earlier, the most among China’s major trading partners, according to CNBC calculations of official data. Imports growth at 0.5% fell short of analysts’ expectations.New iPhones
Apple unveiled lots of new products on Monday night. Highlights: the iPhone 16 Pro and Pro Max get larger screens, while their non-pro siblings finally get the Pro’s “action” button; the freshly redesigned Apple Watch Series 10; AirPods 4 earbuds. Apple’s AI features will launch in beta on the new iPhones — investors will monitor if they push up flagging iPhone sales.$400 million hit to Goldman
Goldman Sachs will post a roughly $400 million pretax hit to its third-quarter results, said CEO David Solomon at a conference on Monday, as the bank winds down its ill-fated foray into consumer banking. Those ventures include Goldman’s GM Card business and a separate portfolio of loans.[PRO] Stocks to ride out shaky September
September is historically the worst month for stocks. It’s the only month during which markets fell for four consecutive years. The volatility we’ve experienced at the start of the month seems to continue this unwelcome trend. Still, there are some steady stocks investors can consider to ride out September’s roller coaster.The bottom line
Maybe all it takes are shiny new things to lift our mood and take our minds off recession fears.
I’m jesting — but just partially.
Apple on Monday launched sleek new iPhones, watches and earphones. The excitement of the event and the prospect of having something look forward to may have lifted market sentiment.
Detractors who think that’s a far-fetched assertion should remember Apple dominates more than half of smartphone shipments in the U.S., according to Counterpoint Research. Further, a 2023 Bloomberg survey found 79% of Gen Zers prefer iPhones over other smartphones, implying that Apple’s market share could grow more as that demographic gains earning power.
True, post-event, Apple shares just crawled up 0.04%. But, as CNBC’s Kelly Evans points out, the Cupertino-headquartered company’s stock tends to fall after product announcements.
This reversal of the trend offers a glimmer of hope that Apple’s plans to integrate AI into its phones will rejuvenate iPhone sales, which have been slumping amid increased competition from Chinese brands.
And when the S&P 500’s biggest constituent is experiencing favorable winds, other stocks will also benefit from its slipstream.
Nvidia jumped 3.5% after falling 14% last week. Broader markets rose as well. Both the S&P and the Nasdaq Composite climbed 1.16%, while the Dow Jones Industrial Average gained 1.2%.
Apart from Apple’s announcement, there wasn’t any other material news that would have impacted markets.
Of course, Apple’s event is not the sole reason markets rose yesterday. Last week’s broad sell-off presents investors with opportunities to pick up stocks at a relatively cheaper price, which would induce a rebound rally.
Markets are still largely driven by sentiment, as mentioned yesterday.
That said, the consumer and producer price index reports coming out Wednesday and Thursday, respectively, are concrete pieces of data that have the potential to affect markets dramatically.
They’ll also let us know if we can afford those shiny new things that Apple’s dangling in front of us.
– CNBC’s Pia Singh and Lisa Kailai Han contributed to this story.
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CNBC Daily Open: Did Apple’s shiny new things uplift markets?
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[ad_2]Attendees inspect the new iPhone 16 Pro and 16 Pro Max during an Apple special event at Apple headquarters on September 09, 2024 in Cupertino, California.
Justin Sullivan | Getty Images News | Getty Images
This report is from today’s CNBC Daily Open, our international markets newsletter. CNBC Daily Open brings investors up to speed on everything they need to know, no matter where they are. Like what you see? You can subscribe here.
What you need to know today
Broad rebound
U.S. stocks rebounded on Monday after posting huge losses last week. It was a broad rally across assets: Oil prices gained 1% and bitcoin rose 4.42%. Europe’s Stoxx 600 index added 0.82%, its first positive movement in days. While the rally was quite broad, fashion houses fell out of favor with shares of Burberry, Hugo Boss and Kering retreating.New iPhones
Apple unveiled lots of new products on Monday night. Highlights: the iPhone 16 Pro and Pro Max get larger screens, while their non-pro siblings finally get the Pro’s “action” button; the freshly redesigned Apple Watch Series 10; AirPods 4 earbuds. Apple’s AI features will launch in beta on the new iPhones — investors will monitor if they push up flagging iPhone sales.Debate over rate cuts
Economists such as George Lagarias of Forvis Mazars think a 50-basis-points rate cut “might send a wrong message to markets.” Michael Yoshikami, CEO of Destination Wealth Management, however, thinks it would be “a very positive sign,” echoing Nobel Prize winner Joseph Stiglitz’s opinion that a 50-point cut should be on the table.$400 million hit to Goldman
Goldman Sachs will post a roughly $400 million pretax hit to its third-quarter results, said CEO David Solomon at a conference on Monday, as the bank winds down its ill-fated foray into consumer banking. Those ventures include Goldman’s GM Card business and a separate portfolio of loans.[PRO] Macro factors don’t sway Buffett
In recent weeks, markets have gyrated because of concerns over the U.S. economy’s health, the state of the labor market, the trajectory of rate cuts, among many other factors. To Warren Buffett, however, none of those macroeconomic factors matters when he invests.The bottom line
Maybe all it takes are shiny new things to lift our mood and take our minds off recession fears.
I’m jesting — but just partially.
Apple on Monday launched sleek new iPhones, watches and earphones. The excitement of the event and the prospect of having something look forward to may have lifted market sentiment.
Detractors who think that’s a far-fetched assertion should remember Apple dominates more than half of smartphone shipments in the U.S., according to Counterpoint Research. Further, a 2023 Bloomberg survey found 79% of Gen Zers prefer iPhones over other smartphones, implying that Apple’s market share could grow more as that demographic gains earning power.
True, post-event, Apple shares just crawled up 0.04%. But, as CNBC’s Kelly Evans points out, the Cupertino-headquartered company’s stock tends to fall after product announcements.
This reversal of the trend offers a glimmer of hope that Apple’s plans to integrate AI into its phones will rejuvenate iPhone sales, which have been slumping amid increased competition from Chinese brands.
And when the S&P 500’s biggest constituent is experiencing favorable winds, other stocks will also benefit from its slipstream.
Nvidia jumped 3.5% after falling 14% last week. Broader markets rose as well. Both the S&P and the Nasdaq Composite climbed 1.16%, while the Dow Jones Industrial Average gained 1.2%.
Apart from Apple’s announcement, there wasn’t any other material news that would have impacted markets.
Of course, Apple’s event is not the sole reason markets rose yesterday. Last week’s broad sell-off presents investors with opportunities to pick up stocks at a relatively cheaper price, which would induce a rebound rally.
Markets are still largely driven by sentiment, as mentioned yesterday.
That said, the consumer and producer price index reports coming out Wednesday and Thursday, respectively, are concrete pieces of data that have the potential to affect markets dramatically.
They’ll also let us know if we can afford those shiny new things that Apple’s dangling in front of us.
– CNBC’s Pia Singh and Lisa Kailai Han contributed to this story.
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U.S. debt is so massive, interest costs alone are now $3 billion a day
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With U.S. debt now at $35.3 trillion, the cost of paying the interest on all that borrowing has soared recently and now averages out to $3 billion a day, according to Apollo chief economist Torsten Sløk.
And that includes Saturdays and Sundays, he pointed out in a note on Tuesday.
The daily interest expense has doubled since 2020 and is up from $2 trillion about two years ago. That’s when the Federal Reserve began its campaign of aggressive rate hikes to rein in inflation.
In the process, that made servicing U.S. debt more costly as Treasury bonds paid out higher yields. But with the Fed now poised to start cutting rates later this month, the reverse can happen.
“If the Fed cuts interest rates by 1%-point and the entire yield curve declines by 1%-point, then daily interest expenses will decline from $3 billion per day to $2.5 billion per day,” Sløk estimated.
Apollo
Meanwhile, the federal government closes out its fiscal year at the end of this month, and the year-to-date cost of paying interest on U.S. debt was already at $1 trillion months ago.
But even if Fed rate cuts lighten the burden on interest payments, the next president is expected to worsen budget deficits, adding to the pile of total debt and offsetting some of the benefit of lower rates.
In fact, a recent analysis from the Penn Wharton Budget Model found that the deficit will expand under either Donald Trump or Kamala Harris.
But there’s a big difference between the two.
Under Trump’s tax and spending proposals, primary deficits would increase by $5.8 trillion over the next 10 years on a conventional basis and by $4.1 trillion on a dynamic basis that includes the economic effects of the fiscal policy.
Under a Harris administration, primary deficits would increase by $1.2 trillion over the next 10 years on a conventional basis and by $2 trillion on a dynamic basis.
Still, JPMorgan analysts called the outlook unsustainable, regardless of who wins the presidential election, while acknowledging the prospect of bigger deficits with Trump.
“Irrespective of the election outcome, the trend since the pandemic has been profligate fiscal policy that is absorbing substantial amounts of capital and is incentivizing additional private investment,” the bank said. “At the same time, the en masse retirement of baby boomers is shifting a substantial share of the population from a high-savings period in life to a low-savings period, depressing the supply of capital.”
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In our new special issue, a Wall Street legend gets a radical makeover, a tale of crypto iniquity, misbehaving poultry royalty, and more.
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Jason Ma
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ETFs are on pace to break record annual inflows, but this wild card could change it all
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Exchange-traded fund inflows have already topped monthly records in 2024, and managers think inflows could see an impact from the money market fund boom before year-end.
“With that $6 trillion plus parked in money market funds, I do think that is really the biggest wild card for the remainder of the year,” Nate Geraci, president of The ETF Store, told CNBC’s “ETF Edge” this week. “Whether it be flows into REIT ETFs or just the broader ETF market, that’s going to be a real potential catalyst here to watch.”
Total assets in money market funds set a new high of $6.24 trillion this past week, according to the Investment Company Institute. Assets have hit peak levels this year as investors wait for a Federal Reserve rate cut.
“If that yield comes down, the return on money market funds should come down as well,” said State Street Global Advisors’ Matt Bartolini in the same interview. “So as rates fall, we should expect to see some of that capital that has been on the sidelines in cash when cash was sort of cool again, start to go back into the marketplace.”
Bartolini, the firm’s head of SPDR Americas Research, sees that money moving into stocks, other higher-yielding areas of the fixed income marketplace and parts of the ETF market.
“I think one of the areas that I think is probably going to pick up a little bit more is around gold ETFs,” Bartolini added. “They’ve had about 2.2 billion of inflows the last three months, really strong close last year. So I think the future is still bright for the overall industry.”
Meanwhile, Geraci expects large, megacap ETFs to benefit. He also thinks the transition could be promising for ETF inflow levels as they approach 2021 records of $909 billion.
“Assuming stocks don’t experience a massive pullback, I think investors will continue to allocate here, and ETF inflows can break that record,” he said.
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US Hiring Rebounds Slightly And Unemployment Rate Dips In Sign Of Still-Slowing Job Market – KXL
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WASHINGTON (AP) — Hiring by America’s employers picked up a bit in August from July’s sluggish pace, and the unemployment rate dipped for the first time since March in a sign that the job market may be cooling but remains sturdy.
Employers added 142,000 jobs last month, up from a scant 89,000 in July, the Labor Department said Friday. The unemployment rate ticked down to 4.2% from 4.3% in July, which had been the highest level in nearly three years.
Collectively, Friday’s figures depict a job market slowing under the pressure of high interest rates but still growing. Many employers are responding to the resilience of consumers, who stepped up their spending in July, even after adjusting for inflation.
With inflation falling steadily back to the Federal Reserve’s 2% target, the Fed is preparing to cut its key interest rate from a 23-year high. Friday’s mixed report on the job market raises the question of how large a cut the Fed will announce after it meets Sept. 17-18. The central bank could reduce its benchmark rate by a typical quarter-point or by a larger-than-usual half-point. Wall Street traders now foresee a roughly 50-50 likelihood of either scenario, according to futures prices.
America’s labor market is now in an unusual place: Jobholders are mostly secure, with layoffs low, historically speaking. Yet with the pace of hiring having weakened, landing a job has become harder.
In its report on August hiring, the government also sharply revised down its estimate of job growth for the previous two months. July’s gain was revised down from an initial estimate of 114,000 to 89,000, June’s from 179,000 to 118,000. In the past three months, hiring has averaged only 116,000 a month, down sharply from an average of 211,000 a year ago.
In a major speech last month, Chair Jerome Powell suggested that the Fed’s policymakers have all but tamed inflation through high interest rates and don’t want to see the job market weaken further. The central bank is trying to achieve a “soft landing,” in which it succeeds in driving inflation down from a 9.1% peak in 2022 to its target level without causing a recession. A lower Fed benchmark rate will lead eventually to lower borrowing costs for a range of consumer and business loans, including mortgages, auto loans and credit cards.
For now, companies are posting fewer job openings and adding fewer workers, while Americans are far less likely to quit their jobs now than they were soon after the economy rebounded from the pandemic. In a strong job market, workers are more likely to quit, usually for higher-paying opportunities. With quits declining, it means fewer jobs are opening up for people out of work.
Becky Frankiewicz, North American president of the staffing firm ManpowerGroup, said that uncertainty around the presidential election and the Fed’s next moves are causing many companies to hold back on new investments and hiring.
“There’s a whole world waiting to see what happens with our election,” she said. “We have this great waiting game. No one wants to make big moves yet.”
Still, Frankiewicz said the job market appears to be stable for now.
“The bottom isn’t falling out, and we’re not seeing a rocket ship,” she said. “It’s stability.”
A slower pace of hiring is often a precursor to layoffs — one reason why the Fed’s policymakers are now more focused on sustaining the health of the job market than on continuing to fight inflation.
Recent economic data has been mixed, elevating the importance of the jobs report, which is among the more comprehensive economic snapshots the government issues. The Labor Department surveys roughly 119,000 businesses and government agencies and 60,000 households each month to compile the employment data.
The Fed’s Beige Book, a collection of anecdotes from the 12 regional Fed banks, reported that many employers appeared to have become pickier about whom they hired in July and August. And a survey by the Conference Board in August found that the proportion of Americans who think jobs are hard to find has been rising, a trend that has often correlated with a higher unemployment rate.
At the same time, consumer spending, the principal driver of economic growth in the United States, rose at a healthy pace in July. And the economy grew at a solid 3% annual pace in the April-June quarter.
Later Friday, Christopher Waller, a member of the Fed’s Board of Governors, is scheduled to discuss the economic outlook in a speech at the University of Notre Dame. Waller, an influential member of the governing board, may provide insights into the Fed’s next moves.
Substantial rate cuts by the Fed could spur some companies to start hiring more quickly, some labor market experts say.
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Grant McHill
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Nobel winner Joseph Stiglitz says Fed raised rates ‘too far, too fast’ — and now needs to cut big
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Nobel Prize-winning economist Joseph Stiglitz says the Federal Reserve should deliver a half-point interest rate cut at its forthcoming meeting, accusing the U.S. central bank of going “too far, too fast” with monetary policy tightening and making the inflation problem worse.
His comments come ahead of Friday’s pivotal release of U.S. jobs data, with investors closely monitoring the August nonfarm payrolls count for clues on the size of an expected rate cut this month. The jobs data is scheduled out at 8:30 a.m. ET.
Strategists have typically said that the most likely outcome from the Fed’s Sept. 17-18 meeting is a 25-basis-point rate cut, although bets for a 50-basis-point reduction have increased in recent days.
A basis point is 0.01 percentage point.
Stiglitz, who won the Nobel Prize in 2001 for his market analysis, joins the likes of JPMorgan’s chief U.S. economist in calling for a supersized rate cut this month.
“I’ve been criticizing the Fed for going too far, too fast,” Stiglitz told CNBC’s Steve Sedgwick on Friday at the annual Ambrosetti Forum held in Cernobbio, Italy.
Stiglitz said it was “really important” for the Fed to have normalized interest rates, adding that it was a mistake for the U.S. central bank to have held the benchmark borrowing rate near zero for such a long period since 2008.
“But then they went beyond that to where the interest rates have been, and I thought that put the economy at risk for very little benefit, probably actually worsening inflation, ironically, because if you looked more carefully at the sources of inflation, a big component was housing,” Stiglitz said.
American economist Joseph Stiglitz Economy Nobel Prize in 2001 attends the Trento Economy Festival 2023 at Sociale Theater on May 27, 2023 in Trento, Italy.
Roberto Serra – Iguana Press | Getty Images Entertainment | Getty Images
“If you think about, how do we deal with the problem of a housing shortage, which is increasing the price of inflation — do you think raising interest rates making it more difficult for real estate developers to build more houses, homeowners to buy more houses, is going to solve the housing shortage? No, it’s going in exactly the wrong way,” he continued.
“So, I believe that they have contributed to the problem of inflation. Now, even though their models don’t work this way, and they’re not looking at things, I think, as deeply as they should, their models tell them [to] look at the weaknesses in the economy, and therefore we should be lowering interest rates.”
The Fed’s benchmark borrowing rate is currently targeted in a range between 5.25%-5.5%.
If he were serving as a Fed policymaker, Stiglitz said he would vote for a bigger rate cut at the central bank’s September meeting, “because I think they went too far, and it would actually help on the issue of inflation and on jobs.”
Asked whether this meant he believed a 50-basis-point rate cut should be on the table regardless of the August nonfarm payrolls figure, Stiglitz replied: “Yes.”
A spokesperson at the Federal Reserve declined to comment.
Bets rising for a half-point reduction
Market participants are firmly pricing in a rate cut at the Fed’s next policy-setting meeting, with bets for a half-point reduction increasing shortly after Wednesday’s release of the report on Job Openings and Labor Turnover Survey, or JOLTS.
The data showed that U.S. job openings fell to their lowest level in in 3½ years in July, in what was seen as another sign of slack in the labor market.
Traders are currently pricing in a roughly 59% chance of a 25-basis-point rate cut in September, with 41% pricing in a 50-basis-point rate reduction, according to the CME Group’s FedWatch Tool. Bets for a 50-basis-point rate cut stood at 34% just over a week ago.
Not everyone says a big interest rate cut is necessary this month.
George Lagarias, chief economist at Forvis Mazars, said that, while no one can guarantee the scale of the Fed’s rate cut at its September meeting, he is “firmly” in the camp calling for a quarter-point reduction.
“I don’t see the urgency for the 50 [basis point] cut,” Lagarias told CNBC’s “Squawk Box Europe” on Thursday.
“The 50 [basis point] cut might send a wrong message to markets and the economy. It might send a message of urgency, and, you know, that could be a self-fulfilling prophecy,” he continued.
“So, it would be very dangerous if they went there without a specific reason. Unless you have an event, something that troubles markets, there is no reason for panic.”
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Variable mortgage rates regaining traction as Bank of Canada cuts rates – MoneySense
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Are more rate cuts likely?
In announcing the rate cut Wednesday, Bank of Canada governor Tiff Macklem said if inflation continues to ease broadly in line with the bank’s July forecast, it is reasonable to expect further cuts in the policy rate.
Julie Leduc, a mortgage broker at Mortgage Brokers Ottawa, said clients with variable-rate loans were not happy when rates were rising, but the cycle is turning.
“We’ve lived the worst of it, we’re on our way out,” she said.
“So let’s look for the benefits and the benefit is, if they go variable and the rates go down, they’re going to live the benefit.”
Right now, the rates offered to those looking for a new variable-rate mortgage or needing to renew are higher than those being offered for five-year fixed rate mortgages, something that Leduc called an anomaly.
That’s because the expectations are that the Bank of Canada will continue to cut interest rates, lowering the amount charged to borrowers in the future. If something unexpected happens and the central bank doesn’t cut rates, then the rates charged on variable-rate mortgages won’t go down.
What to expect if you’re mortgage holder
But if things continue to roll out as expected, those choosing variable-rate loans will see the amount they are charged go down. Just how much and how quickly will depend on the central bank.
Sojonky says the discounts lenders offer to the prime rate for variable-rate mortgages are also improving.
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The Canadian Press
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RBC Capital Markets: Market pricing of RBA rate cuts “totally misplaced”
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Alvin Tan, Head of Asia FX Strategy at RBC Capital Markets cites elevated inflation rates and slowing growth in Australia as proof that the easing path of the RBA will be more gradual, with rate cuts starting next year. Additionally, he examines the BOJ’s policy normalization path, saying that a rate hike would help to strengthen the yen in the long-term, but it would not be a “smooth ride” higher.
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Making sense of the Bank of Canada interest rate decision on September 4, 2024 – MoneySense
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What does the rate cut mean?
The immediate impact of today’s rate cut will be interest rate relief for Canadians.
As a result of today’s rate cut, most Canadian lenders will now lower their prime rates to 6.45%, from the previous 6.7%. This in turn will cause variable-rate borrowing products, including variable-rate mortgages, to also drop, as their pricing is based on prime plus or minus a percentage. Those with home equity lines of credit (HELOCs) will also see their interest rates decrease.
Will the BoC continue to drop its rate?
Today’s quarter-point cut was widely anticipated. In fact, markets had priced in a 100% chance that it would occur. The deal for the rate cut was sealed after the latest inflation numbers trended in the direction the BoC wants: down between 2% and 3%. The July Consumer Price Index (CPI) report revealed inflation fell to 2.5%.
“As expected, inflation slowed further to 2.5% in July. The Bank’s preferred measures of core inflation averaged around 2.5% and the share of components of the consumer price index growing above 3% is roughly at its historical norm,” wrote the BoC’s Governing Council—the body that makes the central bank’s interest rate decisions—in its announcement.
The BoC also pointed out that shelter inflation—the largest contributor to the CPI—is also starting to slow. This includes mortgage interest costs (MIC), which measures the amount of interest Canadians pay on their mortgages. As a result of the previous two rate cuts, MIC dropped to 21% from 22.3% in July. That’s great news. but it also reflects just how much mortgage costs have soared for Canadians since the start of the pandemic.
In addition to inflation, the BoC also stated that recently revealed second quarter gross domestic product (GDP) numbers indicate the economy slowed in June and July. This suggests further rate cuts are to come; in fact, it’s expected the BoC will dole out two more quarter-point cuts in its October and December announcements this year, bringing the Overnight Lending Rate to 3.75%—its lowest since December 2022.
The prognosis is also looking good for 2025, should economic trends continue as the BoC expects. And we could be in store for another four cuts, totalling 1%, by the end of next year, which would bring the benchmark rate to 2.75%. That would be a low not seen since September of 2022, when the BoC increased its rate from 2.5% straight to 3.75% as part of its aggressive hiking cycle.
What does the BoC rate announcement mean to you?
What does it mean for you, your home, your finances and more? Read on.
… if you’re a Canadian with a mortgage
Renewing or borrowing, this rate cut spells relief for Canadians.
The impact on variable-rate mortgages
Today’s rate cut is music to variable mortgage holders’ ears. Variable interest rates will lower to reflect the cut, and how borrowers will be impacted will depend on the type of variable mortgage they have. Those who hold adjustable-rate variable mortgages will see their monthly payment immediately lower, while those on a fixed payment schedule will see more of their payment going towards their principal mortgage balance.
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Penelope Graham
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