Bank of Canada Poised to Cut Rates as Fed Joins In, But for Different Reasons
As the global economy navigates choppy waters in late 2025, central banks are making moves to steady the ship. On September 17, 2025, both the Bank of Canada (BoC) and the U.S. Federal Reserve (Fed) are set to announce their latest interest rate decisions. Markets are buzzing with expectations that the BoC will lower its key policy rate by 25 basis points, bringing it to 2.50% from the current 2.75%. Meanwhile, the Fed is widely anticipated to finally ease after holding steady all year, with a 25-basis-point cut to a range of 4.00% to 4.25% looking like the base case, though some bet on a bolder 50-basis-point move. This synchronized easing is a big deal, but don’t be fooled— the reasons behind these cuts couldn’t be more different. For the BoC, it’s about propping up a weakening Canadian economy battered by trade disruptions and a cratering job market. For the Fed, it’s a response to cooling U.S. employment data, even as inflation lingers stubbornly high. Let’s break it down.
This isn’t just about numbers on a page; it’s about how these decisions ripple through everyday life. Lower rates could mean cheaper mortgages and loans for Canadians, but they also signal underlying worries about growth. In the U.S., a Fed cut might ease pressure on borrowers, but with tariffs in the mix, it’s a delicate balance. As we approach this pivotal date, understanding the “why” behind each bank’s strategy is key to grasping the broader economic picture.
The Bank of Canada’s Path: Battling Economic Weakness and Trade Headwinds
The Bank of Canada has been ahead of the curve on rate cuts this year. After slashing rates by a total of 225 basis points from June 2024 through early 2025, it paused at 2.75% starting in March. That hold was meant to watch how inflation behaved amid rising trade tensions, particularly U.S. tariffs that started biting into Canadian exports. But recent data has shifted the narrative. Canada’s GDP contracted by 0.2% in the second quarter of 2025, following a robust first quarter fueled by pre-tariff export surges. Now, unemployment is at a four-year high, and the labor market is showing “exceptionally weak” signs, with job growth stalling and sectors like manufacturing hit hard by trade disruptions.
Why cut now? The BoC’s primary goal is to keep inflation around 2%, but it’s clear the economy needs a boost. Tariffs from the U.S. have created volatility in global trade, slowing growth to about 2.5% worldwide by year’s end before a modest rebound. In Canada, this has led to a pullback in business investment and consumer spending, despite some resilience in housing thanks to prior cuts. Core inflation has eased to around 2.3% excluding taxes, but shelter costs and wage pressures from a softening job market are keeping things sticky. Economists like those at RBC note that job losses are concentrated in trade-exposed areas, making monetary easing a tool to stimulate demand without overheating other sectors.
A Reuters poll from early September underscores the consensus: most experts see a 25-basis-point cut on September 17, with at least one more to follow by year-end, potentially bringing the rate to 2.25% or lower. This isn’t aggressive easing for inflation’s sake—it’s defensive. The BoC wants to avoid a deeper slowdown, especially with fiscal stimulus from federal and provincial spending plans already in play. Governor Tiff Macklem has emphasized that decisions will be data-dependent, but the cratering jobs report from early September has tipped the scales, with market odds for a cut hitting 90%. If August CPI data (due September 16) shows further softening, it could pave the way for even more cuts in October or December.
In essence, the BoC’s rationale is growth-focused. Canada’s economy entered 2025 strong, with GDP up 1.3% in 2024, but tariffs and slower immigration (now capped at 395,000 permanent residents annually) have dampened population-driven demand. Lower rates aim to encourage hiring, boost housing activity, and offset trade shocks. Without this, projections show GDP growth at just 1.8% for 2025 and 2026—barely above potential. It’s a pragmatic move to keep the recession at bay.
The Federal Reserve’s Shift: Jobs Data Trumps Tariff-Induced Inflation Fears
Contrast that with the Fed. Unlike the BoC, which has already cut aggressively, the U.S. central bank has been on hold since December 2024, maintaining the federal funds rate at 4.25% to 4.50%. Why the pause? Tariffs imposed by the Trump administration earlier in 2025 sparked worries about imported inflation. U.S. CPI ticked up to 2.9% in August—the fastest pace since early 2025—partly due to tariff pass-throughs to consumers. Core inflation remains above the Fed’s 2% target at around 2.9% projected for late 2025, and producer prices have been tamer but still concerning. The economy grew solidly in the first half, but tariffs disrupted supply chains and added uncertainty.
Enter the jobs data. August’s nonfarm payrolls added far fewer jobs than expected, with unemployment rising and job growth stalling since April. This cooling labor market—now at levels hinting at broader weakness—has overridden inflation fears. The CME FedWatch Tool shows over 88% odds of a 25-basis-point cut on September 17, up from earlier in the summer, with some traders eyeing 50 basis points if data worsens. Jerome Powell has stressed a “data-dependent” approach, and recent softening in JOLTS (job openings) and weekly claims has made easing “fully baked in.”
The Fed’s reasoning is dual: prevent a hard landing while monitoring inflation. Unlike the BoC’s tariff-driven slowdown, U.S. growth moderated but remained resilient, with consumer spending holding up thanks to excess savings. However, tariffs have passed on to prices, keeping CPI elevated, and political risks—like Trump’s push to fire Fed Governor Lisa Cook (temporarily blocked by a judge)—add noise. Still, with GDP forecasts for 2025 at around 2%, the Fed sees room to cut without reigniting inflation, especially if tariffs ease through negotiations.
Projections from the June FOMC suggest gradual easing, but recent data has accelerated the timeline. Analysts like those at Deutsche Bank expect cuts to continue into 2026, aiming for a neutral rate around 3.5%. It’s a shift from caution on tariffs to action on employment—the Fed’s dual mandate in play.
Diverging Reasons: Trade Wars, Jobs, and Inflation in Focus
So, why the different drivers? It boils down to economic contexts. For the BoC, U.S. tariffs are a direct hit: Canada exports over half its goods south, and disruptions have led to a 1.5% GDP drop in Q2 alone. Inflation is lower (1.7% headline in April, per core measures), allowing cuts to focus on growth and jobs without much risk. The BoC has cut more because Canada’s economy is more vulnerable to trade shocks and has less fiscal buffer.
The Fed, however, faces a hotter inflation environment from those same tariffs, plus domestic factors like government spending under the “Big Beautiful Bill Act.” U.S. growth is stronger (moderating but solid), so cuts are about fine-tuning the labor market rather than averting recession. As Reuters notes, the Fed is an “outlier,” resuming cuts as peers like the BoC near the end of their cycles. Shared challenges like tariffs bind them, but Canada’s export reliance amplifies the pain, while U.S. resilience delays action.
| Aspect | Bank of Canada | Federal Reserve |
|---|---|---|
| Current Rate | 2.75% (hold since March 2025) | 4.25%-4.50% (hold since Dec 2024) |
| Expected Cut (Sept 17) | 25 bps to 2.50% | 25 bps to 4.00%-4.25% (possible 50 bps) |
| Primary Reason | Weak GDP (-0.2% Q2), high unemployment, tariff disruptions | Cooling jobs (stalled growth since April), despite sticky inflation |
| Inflation Context | Easing to ~2.3% core; shelter costs sticky but overall low | 2.9% CPI in Aug; tariff pass-through keeps it above 2% target |
| Growth Outlook | 1.8% for 2025; vulnerable to trade | ~2%; resilient but moderating |
| Further Cuts Expected | At least 1-2 more by year-end (to ~2.25%) | Gradual through 2026 (to neutral ~3.5%) |
This table highlights the nuances: BoC cuts are more urgent for stability, Fed’s are precautionary.
Potential Impacts: From Mortgages to Markets
These cuts won’t happen in a vacuum. For Canadians, a BoC trim could lower variable mortgage rates, easing affordability amid high housing costs— a key inflation driver. It might spur home sales, which dipped in August, and support consumer spending. But risks remain: if tariffs persist, inflation could rebound, forcing a pause.
In the U.S., a Fed cut signals confidence that inflation is manageable, potentially boosting stocks (already near highs) and real estate. However, with political drama around Fed independence, markets could volatile if Powell signals more cuts than expected. Globally, synchronized easing might weaken the Canadian dollar further against the U.S. one, affecting imports.
Looking Ahead: What Comes After September 17?
Post-cut, eyes will be on follow-through. The BoC might cut again in October if CPI softens, aiming for a neutral rate around 2.25%-2.75%. The Fed could ease more if jobs weaken, but sticky core inflation (projected at 2.9%) might temper aggression. Trade negotiations could change everything—if tariffs ease, both banks might hold sooner.
In a world of tariffs and uncertainty, these cuts show central banks adapting differently. The BoC is playing defense against slowdowns; the Fed, offense against labor risks. As September 17 approaches, investors and households alike should watch closely—these decisions could define the rest of 2025.