Interest Rates May Be on Pause For Now

Last week, both the Bank of Canada and the U.S. Federal Reserve cut their benchmark interest rates by a quarter percentage point. Though we’re two separate countries, both central banks are contending with challenges that monetary policy alone cannot fix.

In Canada, Bank of Canada Governor Tiff Macklem emphasized that the 25-basis-point cut, which brings the policy rate to 2.25%, comes against a backdrop of structural, not cyclical, pressures. Canada’s economy is not slowing because of temporary factors. It’s slowing because businesses face higher costs to establish new supply chains, particularly as trade with the U.S. remains uncertain and tariffs continue to weigh on activity.

Monetary policy cannot resolve structural problems like supply chain disruptions or trade uncertainty. Higher costs for businesses limit the ability of interest rate cuts to stimulate demand while keeping inflation low.

Consumption remains resilient. However, household and business uncertainty, along with modest population growth, weigh on demand. While AI offers potential productivity gains, it also presents disruption risks, adding uncertainty to economic projections. Macklem’s message was that the current policy rate is “about right” to support growth without fuelling inflation.

South of the border, Federal Reserve Chair Jay Powell emphasized the U.S. dual mandate of stable prices and maximum employment. The Fed also cut rates by 25 basis points to a 3.75–4.0% range. However, like his Canadian counterpart, Powell said the U.S. is facing supply-side problems that monetary policy cannot solve. 

The U.S. labour market is softening, with job gains slowing mostly due to lower immigration. Inflation has eased since 2022 but remains slightly above the Fed’s 2% target. 

Looking ahead, Powell noted that a U.S. December rate cut is “not a foregone conclusion”, especially given limited government data from the ongoing federal shutdown and strongly differing views among committee members. 

Both central banks are trying to do what they can with interest rates, but their effectiveness is limited. Canada faces higher costs and structural shifts in trade and supply chains, while the U.S. struggles with a labour market constrained by low immigration. Monetary policy cannot create supply or workforce capacity.

Monetary policy plays a key role in determining stock valuations. If both central banks are expected to pause their rate cuts, that could put some short-term pressure on stock prices. We anticipate a modest market correction as investors adjust to the idea of rates staying on hold for now. However, history shows that remaining fully invested has been essential for capturing long-term stock market growth. Like all previous short-term pullbacks, this too will pass. We plan to buy the dip for clients with cash as dividends roll in.

-written by Jeff Pollock