Wait and see for the Bank of Canada and U.S. Federal Reserve

While the BoC held interest rates steady, uncertainty over the conflict in the Middle East and the future of trade with the U.S. could push rates higher or lower in the near term. “We are closely monitoring the impact of the conflict in the Middle East and how the economy is responding to U.S. tariffs and trade policy uncertainty. Governing Council is looking through the war’s immediate impact on inflation but will not let higher energy prices become persistent inflation. As the outlook evolves, we stand ready to respond as needed,” said the Bank.

The BoC’s latest growth projections see minor changes from January. The BoC now expects Canadian economic growth of 1.2% in 2026, 1.6% in 2027 and 1.7% in 2028, with the caveat that oil prices return to US$75 per barrel by 2027 and U.S. tariffs remain at current levels. Given the same assumptions, the Bank expects inflation to peak around 3% before coming down to the 2% target by early 2027.

On one hand, if the conflict in the Middle East pushes global energy prices higher for longer, the BoC may need to tighten policy and hike rates to contain inflation. On the other hand, if U.S. trade policy becomes more restrictive following the CUSMA review, the BoC may need to accommodate with rate cuts to further support the economy. At this time, we still believe the BoC will hold rates steady in the near term.

During the post-meeting press conference, Fed Chair Jerome Powell confirmed that he will stay on the Federal Open Market Committee’s Board of Governors indefinitely until the criminal investigation relating to the renovations of the Fed’s headquarters is concluded. Powell’s term as Fed Chair concludes on May 15^th, but his seat as Governor has two years remaining. The announcement denies President Trump, a vocal critic of the Fed’s policy decisions, a majority on the Board of Governors.

U.S. growth is still expected to be solid, boosted by ongoing A.I.-related investment and consumption growth. From the Fed’s release, “Recent indicators suggest that economic activity has been expanding at a solid pace… Inflation is elevated, in part reflecting the recent increase in global energy prices… Developments in the Middle East are contributing to a high level of uncertainty about the economic outlook.”

There continues to be dissent within the Fed with one voting member preferring to cut rates by 0.25% this month and three members who supported holding rates but preferred not to include easing bias in the statement. It’s interesting to note that four dissenting members is the highest seen since 1992. We still believe two 0.25% cuts remains likely for 2026, however, this expectation is heavily contingent on how the conflict in the Middle East and energy prices develop going forward.

Times like this really reinforce the value of professional portfolio management and diversification across multiple asset classes, regions, styles and sectors. We will continue to watch how things develop, policy responses, how businesses are impacted and more. We have a well-established playbook on how we monitor, assess and respond.

The strategic asset allocation of our clients’ portfolios remains unchanged. These portfolios are built around long-term goals, long-term time horizons and long-term capital market expectations, and that remains unchanged at this time.

Where we may adjust over time is in our tactical asset allocation, which focuses on the next 12-to-18 months as risks and opportunities become clearer. Given available information, we continue to be tactically overweight equities relative to fixed income and cash in our portfolios with a tactical asset allocation overlay.

Both the BoC and Fed are scheduled to make their next interest rate decisions in June (10^th and 17^th). The Fed’s announcement will be accompanied by the latest Summary of Economic Projections.