Cutting together, Bank of Canada and U.S. Federal Reserve lower interest rates

Wesley Blight

September 17, 2025

Key takeaways

Both the Bank of Canada and the U.S. Federal Reserve cut their respective reference interest rates.
Uncertainties continue to weigh on the Canadian and American economies.
Both central banks are expected to cut rates further before the end of the year.

Following this month’s monetary policy meetings, both the Bank of Canada (BoC) and the U.S. Federal Reserve (Fed) decided to cut their benchmark interest rates by 0.25%. The BoC’s policy rate is now 2.5% and the target for the federal funds rate is now 4.0-to-4.25%. This is the first interest rate cut for the BoC since March and the first for the Fed since 2024. Both decisions were widely expected amid economic growth, trade policy and inflation concerns.

Tariffs and trade continue weigh on the Canadian economy

Shrinking by about 1.5% in the second quarter, Canada’s economy continues to be hampered by tariff and trade uncertainty. Exports declined sharply as the positive effect of businesses rushing shipments through ahead of tariffs wore off. Business investment also declined in the second quarter. Unsurprisingly, the Bank feels economic activity will continue to be disrupted by the effects of tariff and trade policy shifts going forward.

Inflation remains stubborn. Taken from the BoC’s statement, “Preferred measures of core inflation have been around 3% in recent months, but on a monthly basis the upward momentum seen earlier this year has dissipated. A broader range of indicators, including alternative measures of core inflation and the distribution of price changes across CPI (consumer price index) components, continue to suggest underlying inflation is running around 2.5%.”

At this time, we believe the BoC will cut interest rates by another 0.25% before the end of the year.

Weaker labour market prompts first U.S. rate cut in 2025

Much like the BoC, the Fed continues to believe economic uncertainty is elevated. The Fed summarized, “Recent indicators suggest that growth of economic activity moderated in the first half of the year. Job gains have slowed, and the unemployment rate has edged up but remains low. Inflation has moved up and remains somewhat elevated.”

While inflation remains a key concern for the Fed, the other side of its dual mandate, employment, has quickly re-entered the Fed’s focus. Hiring has declined and unemployment ticked higher in recent months, triggering the cut. Once again, the decision was not unanimous, with one voting member preferring to cut by 0.5% instead.

Alongside the September rate cut announcement, the Fed released its latest Summary of Economic Projections (SEP), signaling it would cut rates further. We are aligned with this outlook and expect at least one additional 0.25% cut before the new year.

Interesting fact—according to J.P. Morgan, over the past 40 years, the Fed has only cut interest rates 12 times while the S&P 500 was within 1% of an all-time high.

We continue to hold a net positive view on equities

Despite the uncertainties, global equities have continued marching upward. While risks of an economic slowdown persist, leading indicators have improved, and central banks maintain room to cut rates further if needed. With inflation near central bank targets, supportive fiscal policy and monetary policy continuing to ease, the overall environment remains supportive of risk-on assets like equities.

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 at this time, our outlook for fixed income 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’s and the Fed’s next interest rate announcements are both scheduled for October 29^th.

Wesley Blight

Wesley Blight, CFA, CIM, FCSI, is Vice President and Portfolio Manager with the Multi-Asset Management Team of Scotia Global Asset Management. He is responsible for private asset and multi-asset portfolio solutions.

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