Over the course of the summer, the U.S. Federal Reserve has cut interest rates twice, with the latest drop in its benchmark overnight lending rate taking it to a target range of 1.75% to 2%. Over the same timeframe, the Bank of Canada hasn’t touched interest rates, and the probability of seeing a cut this year has actually decreased, according to analysts.
“That probability of single rate cut in Canada right now is about 12 per cent for October – so that’s really low,” says Farm Credit Canada’s chief economist, J.P. Gervais. “The probability of single rate cut before the end of the year is now at 18 per cent.”
As for the U.S., Gervais says he’s surprised to see where the market place is putting the probabilities of seeing another cut.
“You’re almost at 45 per cent…at seeing another rate cut in October from the Fed. That, to me, is really high.”
For Fed chair Jerome Powell, it’s an awkward situation, with disagreements from within his circles on what to do next, and a tremendous lack of support from President Donald Trump.
“Jay Powell and the Federal Reserve Fail Again,” tweeted the president following the announcement. “No “guts,” no sense, no vision! A terrible communicator!”
For Powell, “it’s almost a no-win situation right now,” says Gervais, who believes the main risk of a too-aggressive cut could be to see inflation pick up.
“Too much inflation is not a good thing, and not enough inflation is also not a good thing. It’s a very delicate balance to reach, for sure.”
As for how the news, and particularly the opposing probabilities of rate cuts in Canada and the U.S., could affect our dollar, Gervais says we could see some softness in the next couple of months. By the end of the year (and without a major shock to the world economy), Gervais doesn’t expect to see the Canadian dollar drop much below 75 U.S. cents.
On the global market, Canada currently sits in an alright position.
“Everywhere else you go there is an easing of monetary conditions, and in Canada we seem to be weathering the storm, which is a little surprising, given that we are so export dependent.”
For agriculture, Gervais says we could see a little pressure on the top line, but without the same upward pressure on expenses that we saw in 2018.
“If you look at what 2018 was like, there was quite a bit of noise around the fact that net income in the farm sector came down, and I would argue that almost 90 per cent of that decline in net income was on the expense side,” he says. “Now, I think we’re seeing quite the opposite in some ways in 2019, where I think gross revenue is going to be pressured.”
Gervais doesn’t expect to see a big rebound in net income in 2019, as a result.