Diverging Paths: How BoC & Fed Decisions Could Impact Your Portfolio

Since mid‑2024, Canadian and U.S. monetary policies have diverged sharply. The Bank of Canada has held rates steady while winding down quantitative tightening, whereas the Federal Reserve continues its cautious, data‑driven stance, delaying any interest rate cuts and resisting market pressure. 

On July 30, the Bank of Canada (BoC) held its overnight rate at 2.75%, marking a third straight pause since March. Inflation remains slightly elevated, core measures nearing 3% and growth has softened amid persistent trade uncertainty. The July Monetary Policy Report reiterated an “easing bias,” but projections suggest only one or two rate cuts may materialize by year‑end, likely in the fall.

The US Federal Reserve (US Fed) held its target rate at 4.25%–4.50% after its July 29–30 meeting, extending its fifth consecutive pause. Chair Powell emphasized a neutral, data‑driven approach, noting mixed signals around inflation and labour market strength. While some Fed officials, including Governors Bowman and Waller, are pushing for earlier cuts, the majority signalled that easing may begin later this year, possibly in September or October.

Figure 1: Bank of Canada vs. Federal Reserve Target Rate (Jan 2024 – July 2025)

At the core of these decisions lies how central banks manage their balance sheets. Quantitative tightening (QT) reduces liquidity via asset runoff, while quantitative easing (QE) increases liquidity through bond purchases. Both are tools to manage financial conditions when rate adjustments are not sufficient.

In Canada, the BoC has ended its QT program and is not resuming large-scale QE. Instead, it uses overnight repos and is gradually rebuilding holdings of Government of Canada Treasury bills via primary auctions, a cautious approach to restore liquidity without reintroducing broad market stimulus effects.

Meanwhile, the U.S. Fed continues QT but is slowing the pace. It maintains runoff of U.S. Treasury securities while allowing mortgage-backed securities to mature naturally, preserving financial conditions without reintroducing full QE.

Market Implications: Currency, Bonds, Equities

• Foreign Exchange:The widening rate gap continues to pressure the Canadian dollar, which weakened ~0.3% after the BoC’s announcement. The Fed’s cautious stance supports the U.S. dollar in the near term.

• Fixed Income: Canadian yields remain anchored with short-term bonds offering stability in a sustained pause environment. U.S. yields may soften if the Fed signals future ease or slows QT further.

• Equities: Canadian rate-sensitive sectors like financials and real estate are potentially positioned to benefit from easier liquidity. U.S. equities await clearer direction from Fed commentary and upcoming economic data, particularly GDP, PCE inflation, and labour statistics.

Why It Matters Now

• Policy divergence between Canada and the U.S. is influencing yield curves, currency flows, and investment positioning.

• BoC maintains flexibility with cautious messaging and no explicit guidance on timing.

• The Fed continues to manage internal balance, signaling rate cuts may begin later, but not yet.

What You Should Consider

• Fixed Income: Explore Canadian short-term instruments amid stable rates; in the U.S., monitor signs of future easing before positioning on yields.

• Equity Exposure: Canadian sectors tied to borrowing costs may outperform; in the U.S., rate-sensitive stocks may react to evolving Fed commentary.

• Currency Risk: Continued pressure on the Canadian dollar suggests investors needing currency exposure should consider hedging strategies.

As this divergence continues, the way each central bank manages liquidity - whether through repos, Treasury purchases, or balance sheet reductions - will remain a key driver for bonds, equities, and currencies. Investors should stay mindful of how these shifts influence yield opportunities and fixed income performance in the months ahead.

If you would like to discuss how these developments could affect your portfolio, please contact us at 604.643.0101 or cashgroup@cgf.com.