Markets Reach Détente On Rate Hikes

There is reason to believe that the U.S. Fed and markets are reaching détente on interest rate hikes, says RBC’s Harbour Group. As well, as recent inflation readings have “come off the boil,” it has seen hints from various Federal Reserve policymakers that a change in pace in rate hikes is coming. First was the acknowledgment that higher interest rates impact the economy with a long and variable lag, most of which are yet to be seen. In addition, the minutes of the Fed’s most recent interest rate meeting show it became clear that many participants were looking to slow the pace of rate increases. On the surface, little has changed in the central bank outlook and they intend to keep raising interest rates. However, markets tend to move on changes at the margins and are relentlessly forward looking. The prospect of a slower pace of rate hikes and softening inflation has caused bond yields to fall, led by the longer-term yields that influence mortgage rates south of the border.