The December Split: A Tale of Two Economies
On December 10, 2025, the North American monetary landscape fractured. In a decisive move to protect a softening labor market, the Federal Reserve cut interest rates by 25 basis points, marking its third consecutive reduction. Conversely, the Bank of Canada held its policy rate firm at 2.25%, citing surprising economic resilience in the face of trade volatility. This divergence signals a complex operating environment for the coming year, where headline rate reductions do not necessarily equate to immediate liquidity for borrowers.
Federal Reserve: The Labor Warning
The Federal Reserve’s decision to lower the target range to 3.50%–3.75% was driven by mounting concerns over the U.S. employment picture. Chair Jerome Powell noted that the labor market might be weaker than official data suggests, referencing a potential "overcount" in payroll numbers. With inflation lingering above the 2% target—compounded by fears that incoming tariffs could stoke varying price pressures—the Fed is attempting to engineer a soft landing without crushing job creation.
Despite the cut, the Fed’s forward guidance remains restrictive. Officials projected only one additional cut in 2026, signaling that while the emergency brake is being released, the engine is not being flooded with fuel. For U.S. markets, the narrative has shifted from fighting inflation to preventing a recession.
Bank of Canada: Calculated Patience
North of the border, Governor Tiff Macklem delivered a different message. The Bank of Canada maintained its overnight rate at 2.25%, the lowest among G7 nations, following a string of aggressive cuts earlier in the year. The decision to pause reflects data showing Canada’s economy grew by a surprisingly robust 2.6% in the third quarter, with unemployment ticking down to 6.5%.
However, this stability is fragile. The BoC explicitly warned that uncertainty remains high, largely due to the looming threat of U.S. trade protectionism. While Canada’s domestic demand appears resilient, the central bank is keeping its powder dry, waiting to assess the full impact of the newly reconfigured North American trade dynamic before moving again.
What This Means for Borrowers: The Lag Effect
For business owners and CFOs, the divergence between the Fed and the BoC creates a clouded credit picture. While rate cuts usually signal easier borrowing conditions, the current volatility—driven by tariff rhetoric and disparity in central bank policy—often leads traditional banks to tighten their credit boxes rather than open them.
We are witnessing what we call the "Credit Lag." Even as the Fed lowers the cost of capital, the risk premiums charged by commercial banks are likely to remain elevated due to macro uncertainty. In this environment, “headline” rates may fall, but the effective access to capital restricts. Bond Capital expects that while public markets digest this volatility, private credit will continue to serve as the critical bridge for companies requiring certainty of execution over the unpredictability of bank consensus.
