📢 This Week’s Fed Minutes and US PCE Shake Markets: What It Means for Canadian Mortgage Rates

This week’s release of the Federal Reserve minutes delivered a curveball to market expectations for 2025 rate cuts. Instead of the anticipated 100 basis points (bps) reduction, the Federal Reserve signalled only 50 bps in rate cuts—reshaping the outlook for financial markets and setting the stage for heightened volatility.

🛠 Market Shifts in Motion:

1. CAD Slide Continues: The Canadian dollar (CAD) took a sharp hit, dropping nearly 1% in two hours and reaching lows unseen in years. The growing spread between US and Canadian rates exacerbates CAD’s decline, reflecting broader economic concerns.
2. Stocks React: Major US indices tumbled, with the Dow down over 1,100 points and the S&P 500 shedding nearly 3%. Markets are recalibrating valuations in light of anticipated higher future rates.
3. Interest Rates Climb: The US 10-year yield surged past a critical 4.50% threshold, dragging Canadian 5-year bonds above 3%. This could mean rising fixed mortgage rates in Canada—an important consideration for borrowers.

💡 What It Means for You:

• Mortgage Rates: Borrowers should brace for potential rate increases. If you're considering locking in a fixed rate, now might be the time to act. Pre-approvals and rate drop requests are crucial tools in this environment.
• Economic Outlook: The Fed prioritizes inflation control, signalling it’s not rushing to ease rates. Meanwhile, the Bank of Canada faces distinct challenges with weaker economic growth and rising unemployment.

The Federal Reserve's latest decision to trim the key interest rate by 25 bps was widely anticipated. However, the surprise lies in its revised projections. The Fed now envisions just two rate cuts in 2025, down from the four initially forecasted. This sharp halving of expectations has ripple effects across financial markets and mortgage planning. Adding to the complexity, the Fed’s core PCE inflation projection has risen to 2.5% for next year, up from 2.2%, with inflation not expected to hit the 2% target until 2027. These projections effectively signal a 3.0% "neutral rate," a 12.5 bps increase from September's expectations.

These developments hold significant implications for Canadian mortgage planning. That tight, almost 1% correlation between the US Federal Funds rate and Canada’s overnight rate suggests that Canadian rates will continue to mirror US trends, albeit with some potential deviation. Markets currently estimate a 25-50 bps difference at most. However, if US inflation continues to rise, it will likely push Canadian yields higher, setting a floor for mortgage rates in Canada.

Bond markets quickly reacted to the Fed’s adjusted stance. Following the announcement, US 5-year yields surged by 15 bps, pulling Canadian 5-year yields up by 10 bps. This jump underscores the interconnected nature of global markets and suggests that Canadian fixed mortgage rates could see upward pressure in the coming days.

The US economy’s resilience—with 4.2% unemployment, sticky price levels, and 3.1% projected GDP growth—indicates less urgency for rate relief in the near term. Some analysts even speculate that this might mark the Fed’s final rate cut of the current cycle. While this remains uncertain, the implications for Canadian borrowers are clear: the likelihood of sustained elevated rates necessitates proactive mortgage planning.

🏡 Planning Ahead:

The insights from the Fed minutes and the latest US PCE data highlight a cautious stance on rate cuts due to persistent inflation concerns. This is more than just a US story for Canadians—it directly influences mortgage rates here. As US inflation data drives the Fed to slow rate reductions, Canadian bond yields often follow suit due to interconnected markets. This means Canadian fixed mortgage rates could see upward pressure, impacting affordability for borrowers.

Understanding these global dynamics is essential to navigate Canada’s housing market. Fixed-rate mortgage seekers should consider locking in rates sooner rather than later. At the same time, variable-rate borrowers should remain mindful of potential upward adjustments that could create trigger risks on variable-rate mortgages. While those choosing adjustable-rate mortgages could face higher payments. Connect with a mortgage expert today to find your most suitable mortgage strategy.

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📩 👉 Contact us now to secure your best mortgage rate and stay ahead of market shifts. Reach out to nesto mortgage experts today for tailored advice on navigating these shifting economic conditions.

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