Bank of Canada and U.S. Federal Reserve kick off 2026 by holding interest rates steady

Jenny Wang

January 28, 2026

Key takeaways

Both central banks decided to hold policy interest rate targets at current levels in January.
Uncertainty has increased regarding the timing and direction of future rate decisions.
We maintain our overall positive view on equities relative to fixed income and cash.

After deciding to end a run of cuts to close 2025, the Bank of Canada (BoC) chose to hold its benchmark interest rate at 2.25% once again at its first monetary policy meeting of 2026. Joining the hold party, the U.S. Federal Reserve (Fed) decided to leave its target policy rate at 3.5-to-3.75% following a run of three consecutive cuts. Both outcomes were widely expected given economic developments playing out in line with central bank expectations.

Uncertainty clouding future interest rate decisions in Canada

While the BoC’s economic outlook remains mostly unchanged from its October projections, “the outlook is vulnerable to unpredictable U.S. trade policies and geopolitical risks,” said the Bank. A notable source of uncertainty is the upcoming review of the Canada-U.S.-Mexico Agreement (CUSMA). From its latest Monetary Policy Report, the BoC now expects Canadian growth of 1.1% in 2026 and 1.5% in 2027.

In line with its October projection, Consumer Price Index (CPI) inflation ticked up to 2.4% in December (up from 2.2%) due to the base effect of 2024’s GST/HST break. Removing this, inflation has been slowing since September according to Bank. Furthermore, the BoC expects inflation to stay close to its 2% target, with trade-derived cost pressures being offset by excess supply.

At this time, we believe the BoC is done cutting rates in the near term. Further out, the outlook is less clear, with some economists expecting an extended hold, others expecting cuts and some projecting rate hikes.

Holding rates amidst distractions

Summarized by the Fed, “Available indicators suggest that economic activity has been expanding at a solid pace. Job gains have remained low, and the unemployment rate has shown some signs of stabilization. Inflation remains somewhat elevated.” Inflation readings have been slow to come due to last fall’s government shutdown.

The Fed’s decision to hold rates steady comes with no shortage of headlines—ongoing tensions with the White House calling into question the Fed’s independence, Chair Powell’s term ending in May and possible replacements, an ongoing criminal investigation related to the renovations of the Fed’s headquarters and a bid to fire Fed Governor Lisa Cook.

Once again, there was dissent within the Federal Open Market Committee as two voting members preferred a 0.25% cut. As a reminder, the Fed did signal in October that the pace of easing would slow with one projected 0.25% cut in 2026. While we agree that the benchmark U.S. rate will head lower, we still believe more than one 0.25% cut is likely.

We remain net positive on equities overall

We continue to hold a positive view on equities as the environment remains supportive of risk-on assets like stocks. 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.

The global economy remains resilient and continues to adapt to fluctuating trade dynamics and other geopolitical uncertainties. Furthermore, policy remains accommodative and economic indicators continue to show improvements. Central banks also maintain room to cut rates further if needed.

With that being said, we must remain resolute in our portfolio management approach as risks remain.

While we believe equities offer greater upside potential versus fixed income, our outlook for fixed income remains positive, nonetheless. 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, to determine the best course of action when positioning your portfolio for long-term success, we will continue to monitor the evolving economic and market landscape.

Both the BoC and Fed are scheduled to announce their next interest rate decision on March 18^th. The Fed’s announcement will be accompanied by an updated Summary of Economic Projections.

Jenny Wang

Jenny Wang, CFA, MA Economics, is a Portfolio Manager with the Multi-Asset Management Team. She is a member of the total portfolio management sub-team and her primary focus is on fixed income investments.

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