Amid tariff threats, the Bank of Canada cuts rates again, while the U.S. Federal Reserve holds steady

Richard Schmidt

January 29, 2025

Key takeaways

The Bank of Canada reduced its policy interest rate further to 3.00%.
The target for the U.S. federal funds rate remains at 4.25-to-4.5%.
Both central banks are cautious of inflation and other potential effects of tariffs and expected Trump administration policies.

Both the Bank of Canada (BoC) and the U.S. Federal Reserve (Fed) announced their latest monetary policy decisions this week. For its sixth consecutive meeting, the BoC announced that it would cut interest rates, this time by another 0.25%, bringing the target for the overnight rate to 3%. Also of note, it announced the end of quantitative tightening, with plans to restart asset purchases in March. Following three previous cuts, the Fed took a more cautious approach and announced that it would hold the target for the federal funds rate at 4.25-to-4.5%. These outcomes were both widely anticipated by markets.

The decisions comes at a time where policymakers are wary of reaccelerating inflation and the uncertainty stemming from the potential economic policies of the Trump administration.

Removing the uncertainty of tariffs, the Canadian economy continues to improve

Previous rate cuts continue to work their way through the Canadian economy and provide a positive boost. Consumption and housing activity continue to improve, while business investment and labour markets remain soft.

As a preface to its latest Monetary Policy Report (MPR), the Bank stated that “projections in the January MPR published today are subject to more-than-usual uncertainty because of the rapidly evolving policy landscape, particularly the threat of trade tariffs by the new administration in the United States.” Furthermore, “since the scope and duration of a possible trade conflict are impossible to predict, this MPR provides a baseline forecast in the absence of new tariffs.”

With this caveat in mind, the BoC sees the risks to its outlook as balanced. It now expects Canadian GDP growth to strengthen in 2025 to 1.8% (2024 growth came in at 1.3%). It also expects Consumer Price Index inflation to remain around its 2% target for the next 24 months. With that said, the BoC admits that “a protracted trade conflict would most likely lead to weaker GDP and higher prices in Canada.” A worst-case-scenario outlook we agree with.

U.S. economy maintains its resilience

From the Fed’s statement, “recent indicators suggest that economic activity has continued to expand at a solid pace. The unemployment rate has stabilized at a low level in recent months, and labour market conditions remain solid. Inflation remains somewhat elevated.”

We’ll have to wait until March for the Fed’s next Summary of Economic Projections, but as a reminder, the Fed halved its 2025 rate cut expectations in December to 0.5% worth of reductions. Fed Chairman Powell decided not to comment on President Trump’s earlier comments about wanting interest rates to come down immediately. Unsurprisingly, the Fed maintained its posture in that it believes “the risks to achieving its employment and inflation goals are roughly in balance” at this time, emphasizing that it will “carefully assess incoming data, the evolving outlook, and the balance of risks” when it determines the extent and timing of further adjustments.

Views on the current environment

Our base case scenario should see equities continue to appreciate. With that said, upside may be limited due to already high valuations and market concentration. U.S. policy uncertainty, ongoing geopolitical concerns, and still weaker growth out of the Eurozone remain some of the key risks.

The BoC’s and the Fed’s next interest rate announcements are scheduled for March 12^thand March 19^th, respectively.

Richard Schmidt

Richard Schmidt, CFA, is an Associate Portfolio Manager with the Multi-Asset Management Team of Scotia Global Asset Management. His primary focus is on North American equity funds and pools.

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