Dual Rate Cuts: Fed and Bank of Canada Move Together
On September 17th, both the U.S. Federal Reserve and the Bank of Canada announced 25 basis point interest rate cuts. The Federal Reserve lowered its target range for the federal funds rate from 4.25% - 4.50% to 4.00% - 4.25%, while the Bank of Canada reduced its overnight rate from 2.75% to 2.50%. The decisions were widely expected following recent inflation prints that showed continued progress toward the 2% target in both countries, alongside updated labour market data and revised growth forecasts. In their post-meeting statements, both central banks reiterated that the path forward will depend on the evolution of economic data over the coming months.
The underlying economic conditions remain distinct. In Canada, inflation increased to 1.9% in August (from 1.7% in July), almost hitting the Bank’s 2% target. At the same time, the unemployment rate rose to 7.1% and the economy contracted in the second quarter, highlighting a weaker growth profile. In the United States, inflation is higher: headline inflation was 2.9% in August, with core inflation at 3.1%, while the unemployment rate moved up modestly to 4.3%. Growth has held up better, with second-quarter GDP revised higher to 3.3%. Retail sales rose by 0.6% in August from July, stronger than many expected, suggesting that consumer demand remains resilient. The Bank of Canada’s decision was driven by tangible signs of slowing growth, while the Federal Reserve’s move appeared more precautionary, reflecting concern over a cooling labour market and an effort to guard against potential downside risks.
Fixed income markets reacted largely as expected. In the U.S., the yield curve continues to show inversion through much of the short- to intermediate-term range, with only a modest upward slope emerging at longer maturities. In Canada, the curve has returned to a more traditional, upward slope, with yields gradually rising across maturities but at lower absolute levels than in the U.S. Credit conditions remain stable, with investment-grade spreads holding near their tightest levels of the cycle - an indication of steady demand for high-quality issuers. The persistence of the U.S. inversion in the short- to intermediate-term range, alongside the upward slope at longer maturities, suggests markets expect policy rates to decline over time even as longer-term risks remain, while Canada’s more normal curve points to expectations of steadier policy and comparatively balanced economic conditions.
Source: World Government Bonds. “Canada Yield Curve Data.” Accessed on September 17, 2025
Source: U.S. Department of the Treasury. Daily Treasury Par Yield Curve Rates. Accessed on September 17, 2025
Looking ahead, futures markets point to additional easing from both central banks, with the Fed now expected to keep cutting through year-end and into 2026, while the BoC is priced for a more measured pace after September. As the policy gap narrows, the Canadian dollar has been steadier, helped by a softer U.S. dollar. For fixed income investors, the direction from here will be shaped by upcoming inflation and labour market data in both countries. Continued evidence of easing price pressures and softer employment conditions would reinforce the current trajectory of rate cuts, while stronger readings could prompt central banks to slow their pace.
World Interest Rate Probability - Source: Bloomberg - September 17, 2025
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