May 8, 2025
Trevor Galon
On Wednesday May 7th, the U.S. Federal Reserve Chair Jerome Powell held a press conference following the Federal Open Market Committee's decision to maintain the federal funds rate at 4.50%, marking the third consecutive meeting without a rate change. Here’s the key takeaways from Powell’s press conference, from a few different perspectives.
First, on the economy and Inflation Concerns:
Chair Powell acknowledged that inflation remains somewhat above the Fed's 2%target. He emphasized that the central bank is adopting a "wait-and-see" approach, monitoring economic indicators closely before making further policy adjustments.
The Impact of Tariffs:
Powell highlighted the uncertainty surrounding recent tariff implementations, noting that sustained tariffs could lead to higher inflation and slower economic growth. He stated that the Fed is assessing the economic effects of these trade policies, which largely took effect in April.
On the Labor Market:
He noted that it remains healthy, with the unemployment rate stable at a low level. Powell indicated that this strength provides the Fed with room to be patient in its policy decisions.
In terms of Politics:
Despite public pressure from President Trump to lower interest rates, Powell reiterated the Fed's independence and commitment to data-driven decisions.
For Future Policy Considerations:
While the Fed is currently holding rates steady, Powell mentioned that further economic deterioration due to tariffs could prompt future rate cuts. Financial markets anticipate a potential rate reduction in July.
The investment market’s reaction was rather muted, with interest rates both in Canada and the U.S. drifting modestly lower, while equity markets inched their way higher into the end of the trading day.
How is, or did this development impact Matco’s Diversified Income Strategy?
This FOMC decision in isolation, perhaps not. However, the implementation or use of tariffs policies to gain political leverage has altered the balance of risks relating to the future direction of interest rates. What I mean by this is that through most of 2024 and heading into 2025 we anticipated interest rates moving lower. They have, and Matco’s diversified income strategy benefitted from this rate move. We do anticipate Canada’s economy to continue to decelerate and Tiff Macklem to cut interest rates 3 more times this year. However, short- and medium-term rates are a safer bet for this decline, while longer Canadian interest rates and U.S. interest rates are both facing greater pressure to stay where they are while having some potential to move higher.
Given this more balanced outlook for interest rates, and more positive outlook for short and medium rates relative to their longer counterparts, we have lowered the investment strategies sensitivity to interest rates, or for the more technically inclined, the strategies duration. Due to our careful selection of securities, bonds and otherwise, the portfolios current yield of 4.2% continues to be much greater than the Canadian bond index which yields 3.5%, as well as high interest savings and GIC rates which both continue to decline.
