European And Canadian Central Banks Lower Rates While The U.S. Stands Pat
Video Length: 00:05:17
On the latest edition of Market Week in Review, Investment Strategist BeiChen Lin recapped the latest rate decisions from the U.S. Federal Reserve (Fed), the Bank of Canada (BoC), and the European Central Bank (ECB). He also shared key takeaways for navigating market volatility and uncertainty, speaking in Mandarin during the final portion of the segment in honor of the Lunar New Year.
Assessing the latest rate decisions from key central banks
Lin began by noting that the Fed, the BoC, and the ECB all held policy meetings this week, with the outcomes from each meeting broadly in line with market expectations. As expected, the Fed opted to leave rates unchanged at 4.25%-4.50% during its Jan. 28-29 meeting, he said, noting that the pause came after the U.S. central bank delivered a cumulative 100 basis points (bps) of rate cuts during the last few months of 2024. Meanwhile, both the ECB and the BoC lowered rates by 25 bps at their respective meetings, bringing their cumulative rate cuts for this cycle to 125 bps and 200 bps respectively, Lin remarked.
Broadly speaking, the reason the Fed stayed on hold while its European and Canadian counterparts delivered additional cuts is because of the continued resilience of the U.S. economy, Lin said. For instance, he noted that U.S. GDP (gross domestic product) grew at a 2.3% annualized pace during the fourth quarter, while fourth-quarter earnings growth among S&P 500 companies is tracking near 11% on a year-over-year basis. When combined with a relatively low U.S. unemployment rate of 4.1%, this has made for a pretty robust economic backdrop, he noted.
In Canada and Europe, however, the story is a bit different, Lin said. “In Canada, for instance, even though overall GDP has been growing, the per-capita measures of GDP growth have actually been contracting in recent months. In addition, Canada’s unemployment rate has risen by 1.7 percentage points from its 2023 low,” he remarked. Meanwhile, in Europe, fourth-quarter GDP growth was only around 1% on an annualized basis—roughly half the pace of GDP growth seen in the U.S., Lin noted.
“This divergence in economic fundamentals between the U.S. and other countries is one of the reasons why I think the Fed has generally been cutting rates at a slower pace. In addition, Fed Chair Jerome Powell also stated at this week’s press conference that he wants to see more progress made on the inflation front before lowering rates again,” he remarked.
Going forward, Lin said he expects that U.S. inflation will continue to moderate as the year progresses, likely putting the Fed in a position to be able to cut rates twice in 2025. However, due to the potential for continued U.S. economic outperformance, the Fed will probably lower rates at a more gradual pace than its peers, he concluded.
The Year of the Snake: A metaphor for the twists and turns that may lie ahead?
As 2025 hits its stride, investors might be faced with different forms of volatility and uncertainty, Lin said. Chief among these could be the potential imposition of tariffs on key U.S. trading partners as well as surprises in economic data, he noted. “For example, while we think that inflation will generally decline, it might not do so in a linear manner,” Lin said.
Perhaps fittingly, he noted that 2025 is the Year of the Snake, which he said could be a powerful metaphor for the months ahead. “Snakes are curvy in shape, and we think the economic and market backdrop could look similar in the months ahead, with many twists and turns possible,” Lin remarked.
Finishing the segment in Mandarin in honor of the Lunar New Year, he stressed that when investors are faced with an uncertain economic environment, it's important to remain calm and disciplined. “We think investors need to be able to objectively look at the latest macroeconomic data and company earnings in order to make better investment decisions. Staying calm is critical to achieving this,” Lin concluded.
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