Bank of Canada Cuts Interest Rates

On Wednesday, September 4th, the Bank of Canada announced a reduction of 25 basis points in interest rates, aligning with market expectations. This marks the third consecutive rate cut by the central bank, bringing the current policy rate to 4.25%, down from 4.5% in August.

Bank of Canada Governor Tiff Macklem stated his desire to see a resurgence in economic growth to absorb the slack in the economy, noting that the overall weak economic trend is still "pushing down inflation."

However, policymakers also reiterated their concerns about the inflation rate not reaching the 2% target. Macklem said, "We need to continually guard against the risks of the economy becoming too weak and the inflation rate falling too much."

These statements reinforce the officials' shift in their inflationary thinking—policymakers are increasingly worried about the downside risks to the economy and have begun to gradually ease monetary policy to achieve a soft landing.

Macklem stated, "Our concern about inflation being below target is the same as our concern about inflation being above target."

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Although the central bank acknowledged that second-quarter economic growth was faster than expected, officials noted that this was mainly due to government spending and business investment. They indicated that there are "some downside risks" to the bank's forecast of economic growth rebounding in the second half of 2024.

Macklem said that housing prices are still too high but have shown initial signs of slowing down. Job growth has been "consistently weak," and it is expected that the weakness in the labor market will slow wage growth.

In June of this year, Macklem became the first central bank governor among the Group of Seven (G7) to initiate monetary easing policies, followed by another rate cut in July.

Capital Economics Deputy Chief Economist for North America, Stephen Brown, stated that after the third consecutive 25 basis point rate cut, the Bank of Canada reiterated the possibility of further rate cuts in its statement. The tone of this communication was not as dovish as expected after signs of slowing gross domestic product growth at the beginning of the third quarter, suggesting that the threshold for a more substantial 50 basis point rate cut at the next meeting in October is relatively high.U.S. Stock Market Turmoil

The U.S. stock market experienced turbulence tonight, with the three major indices showing mixed performances. Wall Street just went through a down day yesterday, with the main stock indices recording their worst performance since the sell-off on August 5th. The latest economic data suggests a slowdown in U.S. economic growth.

Traders anticipate more volatility in September, historically a weak month for stock market performance. Many investors expect increased stock market volatility in September, even though some fund managers view any downturn as a buying opportunity.

In terms of economic data, U.S. job vacancies in July fell to the lowest level since early 2021, with an increase in layoffs, consistent with other signs of slowing worker demand. The U.S. Bureau of Labor Statistics' Job Openings and Labor Turnover Survey on Wednesday showed that U.S. job vacancies in July decreased from the revised 7.91 million in the previous month to 7.67 million, a figure lower than all economists' expectations, with economists surveyed by Dow Jones forecasting 8.1 million.

Federal Reserve policymakers have made it clear that they do not want to see further cooling in the labor market and are expected to start cutting interest rates at the next meeting in two weeks.

The reduction in job vacancies aligns with recent data showing a weakening labor market, causing concern among Federal Reserve officials. Employment growth has been slowing down, the unemployment rate is rising, and job seekers are finding it increasingly difficult to find jobs, intensifying concerns about a potential economic recession.

Following disappointing employment data in July and a significant downward revision of last year's wages, Federal Reserve officials and market participants are closely watching the August employment data to be released on Friday. If this report is also weak, the Federal Reserve may significantly cut interest rates.

U.S. short-term interest rate futures indicate that the possibility of the Federal Reserve cutting interest rates by 50 basis points in September is currently higher than cutting by 25 basis points.