What Moved
On July 31, the US Federal Reserve cut its benchmark rate by 25 basis points to 2.00-2.25% — the first reduction since December 2008. Chair Powell framed it as a "mid-cycle adjustment" rather than the start of an easing cycle, but markets interpreted the move as the beginning of a new direction (Fed, Jul 31, 2019).
The Bank of Canada held its overnight rate at 1.75% on July 10, maintaining the divergence with the Fed. Governor Poloz noted that the Canadian economy was performing somewhat better than the US in certain respects, though trade uncertainty remained a headwind (BoC, Jul 10, 2019).
Canadian housing markets showed improving activity in the summer months. Toronto sales volumes picked up notably, while Vancouver continued its post-foreign-buyer-tax adjustment (CREA, Jul 2019).
Private lending in Canada remained active, with MIC origination continuing at a healthy pace. Several Canadian fund managers reported successful fundraising closes in the first half of the year.
What It Means
The Fed's rate cut — covered in detail in our event-driven analysis — had meaningful implications for Canadian private markets even though the BoC stayed put.
The immediate effect was a global compression of yields. When the world's reserve currency central bank cuts rates, it pulls yields down everywhere. For Canadian investors, this reinforced the attractiveness of private credit strategies that offered 6-9% returns in a world where risk-free rates were heading lower. The yield gap between private and public fixed income was widening, not narrowing.
The BoC's decision to hold created an interesting dynamic: Canadian rates were higher than US rates across most of the curve. This attracted foreign capital into Canadian fixed income, supporting the dollar and keeping borrowing costs stable for Canadian private credit borrowers.
For PE investors, the lower global rate environment was supportive of valuations and deal activity. Leverage was cheaper, and the risk of a rate-driven downturn was diminishing. Across the Canadian alternative investments space, the easing cycle was broadly constructive — reducing borrowing costs while keeping the domestic economy on stable footing.
What We're Watching
Whether the Fed cut was truly a "one and done" or the start of a cycle would shape the outlook for the rest of 2019. Markets were pricing in additional cuts — if they materialized, the yield advantage of Canadian private credit would become even more pronounced.
The BoC's October decision would be the next opportunity for Canadian monetary policy adjustment. If global conditions continued to soften, the Bank might face pressure to follow the Fed lower.
Summer housing data would indicate whether improving sentiment was translating into transaction volume — important for private lenders whose business depends on an active real estate market.
Closing
The Fed's first cut in over a decade was a milestone, and its effects will ripple through private markets for months. For Canadian investors, the message was clear: in a world of declining rates, assets that deliver reliable yield above the risk-free rate become more — not less — valuable.
For the full quarterly analysis, see Q3 2019: The Fed Blinks First.
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