From the Desk

The Beige Book of the U.S. Federal Reserve, which is published eight times a year, just hit the newsstands. This roundup of themes from the 12 Federal Reserve districts that span the United States helps paint the picture behind the numbers.

As the Fed signals that it is less concerned about the threat of inflation and instead shifting to scrutinizing unemployment more closely, it is interesting to cross check that against what is coming from the Beige Book. And the conclusion from the roundup is that economic activity is slowing while the labor market softens.

While the tone of the report is that the jobs market may be gradually weakening, it also notes “reports of layoffs are rare.” Expectations for economic activity were to “remain stable or to improve somewhat in the coming months.” Although what’s also worth watching is that “consumer spending ticked down in most districts.”

All of this suggests an economy that is downshifting but not quickly deteriorating. This latest Beige Book also supports the established view that the Fed can proceed at a measured pace with rate cuts.

Sources: Bloomberg, Financial Times, 2024.  

The Bank of Canada (BoC) continued to favor hitting singles over swinging for the fences as it lowered rates by another 25 basis points (bps) for third time in three meetings. While the central bank’s statement noted that future rate decisions will continue to be data dependent, the opening statement of its press conference indicated a gradual pivot from inflation toward addressing weak economic growth and the deteriorating employment situation.

The bond market may have been leaning toward a small probability of a 50 bp cut by the BoC as the Canadian federal yield curve trailed the U.S. Treasury curve’s move to lower yields on the day. By the end of Wednesday, however, the BoC decision became a secondary story as federal politics took center stage, with the NDP renouncing its agreement to support the governing Liberal Party. This slightly increases the probability of an early election, but neither the NDP nor Liberal Party are likely to want to trigger an election while they are both trailing the Conservatives significantly in the polls.

Source: Bank of Canada, 2024.