U.S. leaves federal funds rate unchanged

On July 31, the U.S. Federal Reserve (the Fed) once again maintained the target range for the federal funds rate at 5.25% to 5.5%. In the Federal Open Market Committee (FOMC) statement, the Fed acknowledged that economic activity continues to expand at a solid pace — which is good news. It also confirmed inflation eased over the last year and progress is being made to bring it down to the target rate of 2% — also good news. However, it still remains elevated. 

Actions speak louder than words, says CIBC Capital Markets Opens a new window.. But with no actions today, the Fed used some dovish words to prevent market interest rates from climbing. A rate cut is expected and fully priced-in for September, with more cuts expected by the end of the year. CIBC Capital Markets confirms the most important update to the FOMC statement today is that it’s now monitoring risks to both inflation and employment, rather than only inflation risks.

Michael Keaveney, Vice President, Managed Solutions, CIBC Asset Management says the July 31 Fed rate announcement was widely expected. “Most observers are looking past the decision and into the accompanying comments for signals as to whether a rate cut is coming in September — which is likely. To date, the U.S. economy has been more resilient than Canada’s. This has given the Fed more reason to wait on rate cuts.”

Speaking on the day of the announcement, Keaveney confirmed, “U.S. government bond prices rose today across maturities, and the U.S. 10-year government bond yield declined to 4.10% in the moments after the rate announcement and into the press conference. The U.S. equity market rallied today and was among the leaders in global equity markets — driven by information technology stocks. Interest rate-sensitive sectors such as utilities, real estate and financials were also increased today, but lagged other sectors.”

As we move into the fall and the U.S. elections, it’s important to remain focused on your long-term investment goals and accept short-term market volatility as a natural part of the market cycle. 

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