Fed Chair Jerome Powell, left, meets with Bank of Canada Governor Tiff Macklem near Moran, Wyo., in 2024. The central bank leaders have been monitoring the effects of U.S. tariffs on their countries’ economies before easing rates.Amber Baesler/The Associated Press
After months on the sidelines, the Bank of Canada and the U.S. Federal Reserve are expected to resume interest-rate cuts this week as trade disruptions take a toll on both countries and the Fed comes under increasing political pressure to lower borrowing costs.
The two central banks paused their easing cycles to wait for more clarity about how U.S President Donald Trump’s tariffs would ripple through the global economy and affect consumer prices. The BoC has held interest rates steady for the past three rate decisions, while the Fed has been on hold since December.
Inflation has not taken off in either country as much as economists had feared, while the job market on both sides of the border effectively stalled over the summer.
That has set the stage for a pivot by both the Fed and the BoC that could inject life into dormant housing markets and provide another leg up for stocks. However, a dovish tilt from central bankers could also signal concern about an economic slowdown, and carry political baggage for the Fed given Mr. Trump’s unrelenting push to get Fed Chair Jerome Powell to cut rates.
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Financial markets expect both central banks to cut their benchmark interest rate by a quarter-point on Wednesday. What happens after that may look very different in each country.
“Certainly in the U.S. it does appear to be the next leg [of an easing cycle] and we can anticipate multiple cuts and perhaps sequentially at consecutive meetings,” Eric Lascelles, chief economist for RBC Global Asset Management, said in an interview.
“I think it’s a little bit harder to say for Canada, mostly because market expectations are so ambivalent, and we’re not getting incredibly clear language from the Bank of Canada to this effect. But to my eye there is room for multiple cuts,” he said.
The BoC lowered interest rates seven consecutive times in 2024 and early 2025, bringing its policy rate to 2.75 per cent from a peak of 5 per cent. The Fed, by contrast, has only lowered interest rates three times over that period, and the target range for the federal funds rate remains between 4.25 per cent and 4.5 per cent.
That leaves the Fed with more distance to go before getting interest rates back to a neutral level. Traders are betting on five quarter-point cuts from the Fed over the next year, but only two cuts from the BoC, including one this week, according to LSEG data.
The Fed will publish a new forecast on Wednesday, including a “dot-plot” which captures policy makers’ expectations about future interest rates. The BoC won’t have a new forecast, leaving analysts to parse Governor Tiff Macklem’s comments in the press conference after the rate announcement.
“The Bank of Canada has been careful not to offer much guidance, but I think what the market will really be looking for is how likely is an October cut,” Douglas Porter, chief economist at Bank of Montreal, said in an interview.
For the BoC, the trajectory of interest rates depends on inflation, as well as the health of the Canadian economy, which continues to face steep U.S. tariffs on key industries with little indication that deals to remove them are within reach.
Gross domestic product contracted 1.6 per cent at an annualized rate in the second quarter, driven by a sharp drop in exports. That’s expected to rebound somewhat in the third quarter, but to remain weak. The rate of unemployment, at 7.1 per cent in August, is the highest since 2016 outside of the pandemic.
Statistics Canada won’t publish the August inflation numbers until Tuesday, only a day before the rate decision.
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In recent months, closely watched core inflation measures have come in above 3 per cent. However, Mr. Macklem has mostly played this down, arguing in July that there “are reasons to think that the recent increase in underlying inflation will gradually unwind.”
Since then, Prime Minister Mark Carney has removed retaliatory tariffs on many U.S. goods, reducing price pressures for imported products.
“We’re definitely not out of the woods, there are some areas of underlying inflation that keep popping up,” Mr. Porter said. “But I do think the employment picture has shifted so markedly that that’s likely to overcome any of the lingering concerns about sticky core inflation.”
The situation is different south of the border, where economic growth remains comparatively robust and price pressures are more of a concern.
Headline inflation in the U.S. increased two ticks to 2.9 per cent in August. Economists expect U.S. inflation to remain elevated in the coming months as businesses run down their inventories and start passing tariff costs along to customers.
“Until recently there was no case for Fed cuts because the U.S. economy was essentially at full employment, and inflation was above the Fed’s target,” Avery Shenfeld, chief economist at Canadian Imperial Bank of Commerce, said in an interview.
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Over the summer, however, there was a significant deterioration in the U.S. labour market, which has caught the Fed’s attention, given its dual mandate to control inflation and promote full employment. The latest jobs report showed the U.S. added only 22,000 positions in August, while previous months were revised down to show job losses.
While this may justify a cut this week, the decision to resume monetary policy easing will be shadowed by political questions.
Stephen Miran, a close economic adviser to Mr. Trump, was appointed an interim governor at the Fed.Annabelle Gordon/Reuters
Mr. Trump has spent months publicly attacking Mr. Powell and demanding the central bank, which is supposed to act independently from politics, lower interest rates. The President has also moved aggressively to try to overhaul the Fed’s voting body, appointing Stephen Miran, a close economic adviser, as an interim governor and attempting to fire governor Lisa Cook – a move that she is fighting in court.
Mr. Shenfeld said he expects political pressure to influence the Fed on the margin.
“If it weren’t for the pressure to ease, they might well have decided to wait and see another month of data and make this decision in October,” he said.
Mr. Powell’s term as chair is scheduled to end next May and potential replacements, including members of the Fed’s governing board, are already jockeying for position.
Mr. Porter of BMO said that may explain some of the dissenting votes at the last Fed rate decision, with governors Michelle Bowman and Christopher Waller both breaking rank and voting for a cut.
“I don’t think it’s a coincidence that both the dissenters had been appointed by Mr. Trump in his first administration, and one is certainly in the mix to be the next Fed chair,” Mr. Porter said.