Markets rallied with expanding breadth

Investor sentiment shifted to a “risk-on” attitude in the third quarter, in response to changes in central bank monetary policy across key economies. It began with the Bank of Canada (BoC) and the European Central Bank (ECB) in the second quarter. The BoC was particularly active, making two additional cuts of 25 basis points (0.25 percentage points) to its overnight rate this quarter. The U.S. Federal Reserve (the Fed) started its own policy easing with a surprise 50 basis-point (0.5-percentage-point) cut in mid-September, launching rallies in both bond and equity markets.

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While the Fed may have surprised investors with a larger-than-expected cut, a closer look at the U.S. economy suggests that the need for interest rate cuts, at that point in time, was justified. The Fed noted an increase in the unemployment rate that is becoming a concern, while the battle against inflation is no longer a primary reason to maintain a restrictive monetary policy. Fed chair Jerome Powell stated, “If the labor market were to weaken unexpectedly or inflation were to fall more quickly than anticipated, we are prepared to respond.”

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