After BoC decision & Fed commentary, what’s the interest rate outlook?

Another ongoing source of inflationary pressure that Burkett remarks on is the dislocation between monetary and fiscal policy. While the Bank of Canada has raised rates and pursued quantitative tightening, the Federal Government has run massive deficits and spent in ways that seem to run contrary to an inflationary environment. Burkett thinks there is an attempt on the part of government to stimulate while the central bank tries to cool things off, with the goal of avoiding recession. He describes that attempt as somewhat “reckless,” and another possible reason why Macklem has maintained a hawkish tone.

Following yesterday’s announcement, Burkett now thinks that interest rate cuts in Canada will come in July, following a Fed cut in June. He thinks the more dovish tone taken by Powell will mean the US cuts first. That US cut will then give Macklem the last bit of cover he needs to cut. That market is roughly in line with where the market consensus sits now, but Burkett accepts he is perhaps a bit more cautious.

Given that outlook he sees a preference for shorter dated fixed income. Longer-duration bonds may be too much of an attempt to time the market right now, and may be subject to too much volatility around interest rate expectations. Stocks have surprised to the upside so far this year, but Burkett also advocates caution, especially around the big tech names that seem to be leading the market. Defensive, non-cyclical names look more attractive to Burkett, within the context of an all-weather portfolio.

Beyond asset management, another delay in BoC cuts can have a serious impact on clients’ financial plans, goals, and overall wellbeing. More and more clients are seeing their mortgages come up for renewal, which could derail their overall plans. Burkett says that as an advisor, the responsible thing to do in these situations is to encourage clients to pay down existing debts rather than contribute to their investment accounts in the immediate term. Burkett would rather see his client pay off a line of credit with an 8-10 per cent interest rate, than invest and try to achieve a risk-free rate that significantly outperforms what they’re losing on interest. He says that this kind of advice is something that wins trust from clients and improves the overall relationship between advisor and client.

Beyond those personal finance decisions, Burkett cautions against trying to time the market. There are a host of reasons for people to be worried, but even the past few years have shown that those who stayed invested have largely come out ahead.