Stagnant short-term interest rates and falling long-term interest rates will further expand inverted interest rates.

The Bank of Canada's monetary policy meeting assessing the U.S. interest rate hike two days ago decided to keep rates unchanged. It is a conclusion based on signals of easing excessive demand, the lag in monetary policy, and the strength of underlying inflation. The Bank of Canada before the pandemic did not move before the Federal Reserve. However, in the interest rate hike curve from spring 2022 onwards, there have been noticeable proactive moves ahead of the Federal Reserve. They made significant 1% interest rate hikes, stopped rate hikes in March, and resumed rate hikes in June.

It is self-evident that the Canadian and USA economies, which are connected by the real economy through USMCA, are interrelated. With the recent interest rate hike pause, it seems highly likely that Canada's policy interest rate will become the terminal rate (5%). Even in the strong-demand USA, the peaking out of inflation is evident. The USA will also determine the terminal rate at 5.5-5.75% a little later, at the FOMC meeting on November 1st.

For Chairman Powell, the turning point FOMC meeting is not in September but in November. Two years ago, it was acknowledged that inflation was not transitory, and last year, the decision was made to slow down the pace of interest rate hikes. This year is likely to see the final interest rate hike decision. The slowdown in the pace of interest rate hikes last year was due to policy changes from the bond turmoil in the UK and the weakening yen in Japan. International coordination was reached in discussions between the IMF and G7 in October.

Amid global inflation, the United States is the only country in the world that can raise interest rates. In the midst of economic wars against Russia and China, the Usa cannot overlook the plight of its ally G7. A halt in interest rate hikes is likely the first step. If interest rate hikes stop, bonds with predictable carry (income gains from those bonds within the period) can be purchased.

If there is a mix of bonds that can and cannot be bought, selling bonds will cease and long-term interest rate increases will disappear. The loan-to-deposit spread of JP Morgan in 2Q is as high as 261 basis points, which is still a very attractive level even if the impact of two interest rate hikes (50 basis points) is eliminated. The idea that negative interest rates lead to an economic downturn is incorrect. It is predicted that short-term interest rates will remain unchanged and long-term interest rates will decline, suggesting a further expansion of negative interest rates.