How to Make Sense of Three Interest-Rate Policy Moves

Transcript

Hello everyone, welcome to market weekend review. This is the week of September 19th, 2025. My name is Bait Chan Lynn. I'm a senior investment strategist and head of Canadian strategy here at Russell Investments. So today we'll be discussing three major topics. First, central bank week. Second, the subdued US housing market. Finally, we'll talk about the real estate sector more broadly. So let's dive right in. First, starting with central banks, it's been a pretty busy week. We had great decisions out of the US Federal Reserve, the Bank of Canada, and the Bank of England, just to name a few. Let's start with the US Federal Reserve. The US Federal Reserve decided to resume rate cuts at its meeting this week, lowering their overnight rate by 25 basis points. This was the first rate cut by the Federal Reserve in 2025 after they had been previously been on hold for an extended period of time. The reason the Federal Reserve decided to cut interest rates was primarily because of risk management rather than because of a weakening economy. In fact, by many measures, the US economy is still quite robust. When you look at initial jobless claims, those are still relatively well behaved. When you look at the retail sales data this week, those were relatively strong. And when you look at corporate profits, they they've been relatively healthy in both Q1 and Q2. But as Chair Powell notes, the risks of a potential slowdown in the US economy versus the risk of an upside surprise to inflation might have come more into balance. And as a result, the Federal Reserve felt it was prudent to cut interest rates by 25 basis points. Looking ahead, we expect that the Federal Reserve will continue to gradually cut rates over time with the next rate cut likely coming in December. And we expect the Federal Reserve to normalize interest rates over time until interest rates reach a neutral level of around three and a quarter percent. For the Bank of Canada, they also cut interest rates by 25 basis points. Again, also in line with market expectations, but the Bank of Canada's reason for rate cuts was a little bit different because unlike in the US where our base case is for the US to achieve a soft landing over the next 12 months, we think the economic risks in Canada are somewhat more elevated. In fact, when you look at Canadian GDP, it contracted in the second quarter, and it's possible that we might see subdued or even another quarter of contractionary economic activity in Canada in Q3. The labor market in Canada has also been under pressure with the unemployment rate having risen to just over 7%. And so against that backdrop, the Bank of Canada decided that they needed to take interest rates down below the midpoint of their estimated neutral range in order to help support the economy. As we look ahead, we believe that the Bank of Canada might cut interest rates at every single meeting for the rest of this year and they might continue cutting rates into 2026 in order to be able to stabilize and support the economy. Finally, with respect to the Bank of England, they actually didn't cut rates at all. Rather, they left interest rates unchanged in line with consensus expectations. Now, in England, one of the tricky things has been inflation. Even though inflation rates have come down significantly over time, it's still not quite yet at a level where the Bank of England wants inflation to be. Nevertheless, we believe that the Bank of England will likely gradually normalize interest rates further over time given that currently the bank rate is at 4% and we think the neutral rate of interest for England is closer to 3%. Next, I want to talk about the US housing market. Some measures of the US housing market are still relatively subdued in the US, whether it's US home builder sentiment or things like existing home sales. One of the challenges for the housing sector in the US has been elevated interest rates. Even though interest rates have come down from their peak, when you look at the rate on a 30-year fixed mortgage loan in the US, it's still above 6%. And that makes it harder for home buyers to finance their homes. Nevertheless, as the Fed continues normalizing interest rates, we expect that this will eventually help become more supportive for the housing market in the United States. Finally, I want to wrap up with a discussion of the real estate sector more broadly because it's important to remember that when we think about real estate, especially listed real estate, it's more than just the housing market. It's more than just offices. Listed real estate is actually a very broad category of assets. It includes everything from malls to hotels to self- storage to senior resident living facilities. And when we look at the listed real estate market, we see that listed real estate in general is actually trading at more attractive valuations today compared to broader equities. So if you're thinking about equity markets being at all-time highs, then real estate might potentially be an interesting way for you to diversify your portfolio holdings. That's all for us. Thanks for tuning in. We'll see you next time. Hi, I'm Sophie Anton, head of portfolio and business consulting at Russell Investments. If you liked what you just saw and heard, consider subscribing to our YouTube channel or check us out on LinkedIn. Thanks for tuning in.

Key Takeaways

Fed, Bank of Canada lower rates
Bank of England holds steady
Housing market could see boost

On this week’s edition of Market Week in Review, Senior Investment Strategist and Head of Canadian Strategy, BeiChen Lin, unpacked the latest rate decisions from major central banks. He also assessed the health of the U.S. housing market and potential opportunities in listed real estate.

Safety Cushion

Lin began by noting the U.S. Federal Reserve (Fed), Bank of Canada and Bank of England each held policy meetings this week. Starting with the Fed, he said the central bank’s 0.25% rate cut was the first of the year, ending a long stretch of unchanged monetary policy.

“This was primarily a risk management cut, rather than a cut made because of a weakening economy,” Lin stated, emphasizing that by many measures, the American economy remains robust. As evidence, he pointed to the recent drop in unemployment claims, strong retail sales numbers and healthy corporate profits.

Looking ahead, he expects the Fed to gradually lower rates over time until monetary policy is neutral—at a level that neither speeds up nor slows down the economy. Lin added that another cut is likely in December.

Clear Cut

To the north, the Bank of Canada (BoC) also dropped rates by 0.25%, but for a different reason. “The economic risks in Canada are more elevated than in the United States,” Lin explained, noting Canadian GDP (gross domestic product) fell by 1.6% last quarter. In addition, the country’s labor market remains under pressure, with the unemployment rate topping 7% in August.

Against this backdrop, the BoC lowered rates primarily to bolster Canada’s sagging economy, Lin said. Looking ahead, it’s possible bank officials could slash borrowing costs twice more this year, with rate reductions continuing into 2026, he remarked.

Meanwhile, across the Atlantic, the Bank of England (BoE) kept rates unchanged, citing stubborn inflation. “While UK consumer prices have fallen significantly the past few years, they’re not quite at the level the bank wants to see,” Lin explained. That said, he thinks the BoE will gradually lower rates over time, particularly since the “neutral” rate is likely around 3%.

Homefield Advantage

Pivoting back to the U.S., Lin said some measures of the country’s housing market—including homebuilder sentiment and existing home sales—remain subdued. Elevated interest rates are partly to blame, he said, noting 30-year mortgage rates are still above 6%. As the Fed continues to cut rates, financing a home could become easier over time, Lin said.

He closed by broadening his focus to the general real estate sector, which consists of everything from malls and hotels to self-storage facilities and retirement communities. “Overall, listed real estate is trading at more attractive valuations than many U.S. stocks today. This presents a potentially compelling way for investors to diversify their portfolios,” Lin concluded.

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