Both the Bank of Canada and U.S. Federal Reserve cut interest rates again amid economic uncertainty

Richard Schmidt

October 29, 2025

Key takeaways

The Bank of Canada and the U.S. Federal Reserve both cut interest rates by 0.25% in October.
We believe the Bank of Canada is done cutting for the year, while the outlook is foggier for the Fed.
We maintain our positive view on equities relative to fixed income and cash.

For consecutive monetary policy meetings, both the Bank of Canada (BoC) and the U.S. Federal Reserve (Fed) have decided to cut their benchmark interest rates by 0.25%. The BoC policy rate is now 2.25% and the target for the federal funds rate is now 3.75-to-4.0%. Both central bank decisions were widely anticipated given ongoing concerns about growth, trade, other geopolitical issues and stubborn inflation.

Trade remains top of mind for the Bank of Canada

U.S. trade policy and its effects on the Canadian economy have become clearer. However, Washington’s actions remain somewhat unpredictable, keeping uncertainty elevated. With slightly more clarity, the BoC resumed providing economic growth projections in its October Monetary Policy Report (MPR). The BoC expects Canadian economic growth of 1.2% in 2025 (revised down from 1.8% from the January MRP), 1.1% in 2026 (revised down from 1.8%) and 1.6% in 2027.

The economy continues to be hampered by tariff and trade uncertainty. Unsurprisingly, exports remain depressed as the positive effect of businesses rushing shipments ahead of tariffs wore off. Business investment has also been weak. Sectors targeted by the U.S—automotive, steel, aluminum and lumber—have been particularly hard hit. While household spending grew at a healthy pace, the labour market remains weak. The Bank still expects inflationary pressures to ease in the months ahead and for inflation to remain around its 2% target.

“The Canadian economy faces a difficult transition. The structural damage caused by the trade conflict reduces the capacity of the economy and adds costs. This limits the role that monetary policy can play to boost demand while maintaining low inflation,” summarized the Bank. At this time, we are aligned with the BoC’s economic projections and believe the Bank is done cutting rates for 2025.

Back-to-back rate cuts for the U.S. as labour conditions continues to be a concern

While economic growth in the U.S. has been relatively strong, supported by the A.I. boom, employment and inflation remain concerns. The Fed continues to believe economic uncertainty is elevated. Summarized by the Fed, “Available indicators suggest that economic activity has been expanding at a moderate pace. Job gains have slowed this year, and the unemployment rate has edged up but remained low through August; more recent indicators are consistent with these developments. Inflation has moved up since earlier in the year and remains somewhat elevated.”

Once again, the decision to cut the federal funds rate by 0.25% was not unanimous—one voting member preferring no change and another member preferring 0.5% cut instead. Additionally, alongside the rate cut decision, the Fed announced that it will be ending its balance sheet reduction program (quantitative tightening) at the beginning of December. This should support funding markets by allowing the secured overnight financing rate (the interest rate that the Fed lends to commercial banks) to come down.

Following the Fed’s September decision to cut interest rates, we expected an additional 0.25% cut for the remainder of 2025. This has played out; however, an additional adjustment can’t be ruled out at this time as the Fed will assess a wave of evolving data in deciding how to proceed forward.

Maintaining our net positive view on equities

We continue to hold a positive view on equities relative to fixed income and cash. The environment remains supportive of risk-on assets like stocks—the global economy remains resilient and continues to adapt to fluctuating trade dynamics, policy remains accommodative, improving economic indicators and central banks having room to cut rates further if needed. Risks have continued to ease but remain. Market concentration, particularly in the U.S., is increasingly concerning, but there are signs that innovation at mega cap companies is supporting a broad range of other businesses.

As a result, we have a modestly bullish 12-to-18-month outlook, and we remain tactically overweight equities relative to fixed income and cash in our portfolios with a tactical asset allocation overlay.

While we believe equities offer greater upside potential relative to fixed income, our outlook for fixed income nonetheless remains positive. While bond prices have recently faced some pressure as yields have risen, the higher yields present a more attractive income opportunity for investors.

As always, we will continuously monitor the evolving economic and market landscape to determine the best course of action with regards to positioning your portfolio for long-term success.

The BoC and the Fed will both end the year with interest rate announcements on December 10^th. The Fed’s announcement will be accompanied by an updated Summary of Economic Projections.

Richard Schmidt

Richard Schmidt, CFA, is a 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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