This week, the Bank of Canada lowered its policy rate by 25 bps and offered comments that leaned dovish in tone; we forecast another 25 bps cut in July. The European Central Bank (ECB) also delivered a 25 bps rate cut, a communicated and somewhat cautious stance for monetary policy going forward. We look for an ECB rate pause in July.
Since the start of the year, expectations for a later start to Fed easing in the wake of stubbornly-high inflation have pushed up benchmark Treasury yields. Notable in the advance of nominal yields has been relatively stable inflation expectations among market participants. Fairly steady breakeven rates suggest markets still view the Fed's commitment to 2% inflation as credible.
The latest FOMC meeting minutes and a flock of Fed officials on the speaking circuit this week provided additional evidence that rate cuts this summer are not likely. On balance, the Fed communication channel conveyed a sense that monetary policy was transmitting through the economy at a slower pace than previous cycles and a desire for more patience in order to gain certainty that inflation is on its way to 2%.
Market participants have significantly dialed back their expectations of the total amount of Fed easing this year, but recent data keep a 25 bps rate cut at the September meeting in play.