It’s official, kids.
“The time has come,” says Fed boss Powell on Friday, “for policy to adjust.” That means the most important central bank on the planet will start cutting rates in a few weeks. Canada is already doing it – two nicks so far. Another after Labour Day. Two more in the autumn.
We’re not alone. The European Central Bank is on a cutting course as well. Ditto for the Bank of England. Across the industrialized world the cost of debt is falling and will continue to come down in 2025. Here are the latest odds, for example, that Mr. Market is giving for US rate reductions…
By this time a year hence, the BoC rate will be 2.5%, economists figure. So, we’ll be seeing 3% mortgages once again.
First, why is this happening? Second, why are so many so pissy about it?
The answer to the initial question is simple. To keep economies growing. The rate-hiking cycle was never meant to kick house prices lower, but instead to reduce the escalating cost of goods and services leading to a destructive wage-price spiral. And that happened. The target for CPI is 2% and we’re at 2.5%. Close enough. Call it a win. No, groceries aren’t going to drop since that would be deflation, which occurs only when an economy truly tanks
But rents will likely decline and, in fact, have been reduced this summer in several Canadian cities. Mortgage interest expense (the biggest hunk of CPI) will certainly tumble, as has been happening. Home loans have gone from 6%+ to 4%+. Real estate prices have eroded about 15% nationally.
Higher rates also cost jobs, now occurring. The unemployment rate in Canada and the US has increased. We lost net paycheques last month. Higher rates reduce credit, dampen demand, add to business overhead, lessen consumer spending and erase hiring intentions. Unless these things are mitigated, or reversed, the economy will continue to lose steam. Growth could turn negative. After a couple of quarters of that, we have recession. Nobody wants that – certainly not the guys in charge of monetary policy.
“We expect a sequence of quarter-point rate cuts beginning on September 18 with the easing cadence slowed after March as policy rates head into the 3% range,” say the economists at BMO. “And the net risk also remains the same, that rates could be cut even more aggressively.”
By the way, after the Fed announcement Friday the US$ tanked, our loonie exploded higher, commodity prices jumped and bond yields fell. That Canada five-year yield (which influences mortgage rates) has dropped a massive 1% since early summer.
There’s no stopping this train now. Not even the crazy Teamsters can do that.
So why are so many people lamenting this rate-trashing phase? The comments section yesterday was an unusually superb moanfest.
Also simple. People who don’t own real estate desperately want some and understand that lower mortgage rates may bring higher prices. So they blame Boomers, politicians, immigrants and central bankers. The siren song of Pierre Poilievre – that simply replacing the current prime minister with him will fix it all, because Trudeau is responsible for inflation, stupid rents and insane house values – resonates.
They wanted owners with mortgages coming up for renewal to bleed from every orifice and be forced to dump their real estate. They hate the banks for giving those people fixed payments and longer amortizations. They abhor Chrystia for applauding it. They crave pain, suffering and loss. Not for them, silly, but everyone else. Especially if they’re old homeowners. That would be generational fairness.
The meme that the young have been screwed over by society (bankers, corporations, government, everyone over 50) is entrenched now. Logic and history matter not. We have nurtured an articulate, educated cohort of professional victims.
But wait. The wrinklies are wasted, too.
A serious drop in CB policy rates – which is clearly coming – also trashes the interest income oldies were starting to count on. GICs at 5% were all over the place earlier this year. Now they are starting to vanish. Soon it will be hard to grab 4%. Then 3%. After even modest inflation and taxes, savers will get net nothing.
These risk-averse folks are as envious and bitter as the kids. They see stock markets jumping 15% or 20% in a year and people with financial portfolios reaping double-digit returns decade after decade. Yet they lack the confidence to invest, and think government has abrogated its role in keeping interest rates well north of inflation. The last thing retired GIC-lovers desire is for central banks to unwind their tightening cycle – because they don’t actually care about the economy, employment levels or (frankly) others.
So, we have arrived here. Read yesterday’s comments. If they are a true reflection of our society, we are a graceless, ungrateful, selfish, myopic, unschooled people. That turmoil and conflict lie ahead is certain.
About the picture: “Hey garth been reading your blog for a minute now had a couple months off and just trying to catch up on all the blogs I’ve missed,” writes Riley. “Thanks for the financial wisdom as they don’t teach it these days they tell everyone panic buy a house before you won’t be able too and that’s about it! Here is a friend and ours puppies hanging out Cora and Mojo (our portugese water dog).”
To be in touch or send a picture of your beast, email to ‘[email protected]’.
