The Great Decoupling
For the first time in this cycle, North America’s central banks have vividly diverged, signaling a complex financial landscape for 2026. On December 10, the continued correlation between US and Canadian monetary policy fractured. The Federal Reserve lowered its benchmark rate by 25 basis points to a target range of 3.50%–3.75%, while the Bank of Canada chose to hold its policy rate steady at 2.25%.
For corporate borrowers, the headline rate is less important than the signal sent by policymakers: the path to cheap capital is neither straight nor guaranteed. With trade protectionism looming and inflation risks resurfacing, volatility is the only certainty.
The Fed: A House Divided
While the Federal Reserve cut rates for the third consecutive time, Chair Jerome Powell delivered a message that was anything but dovish. Powell indicated that the central bank has potentially “delivered enough” easing for the near term, projecting only a single rate cut for the entirety of 2026. This “hawkish cut” suggests that while the Fed acknowledges labor market weakness, it is increasingly fearful of reigniting inflation—specifically driven by the inflationary pressure of anticipated tariffs.
Notably, the decision was marked by significant internal friction. Three officials dissented—the highest number since 2019—highlighting a lack of consensus inside the world’s most powerful central bank. When policymakers cannot agree on the direction of the economy, it creates a fog of uncertainty that inevitably causes commercial banks to tighten credit standards.
The Bank of Canada: Resilience Over Stimulus
North of the border, Governor Tiff Macklem held the overnight rate at 2.25%, citing an economy that has proven surprisingly resilient. Third-quarter GDP growth of 2.6% and a drop in the unemployment rate to 6.5% gave the Bank of Canada room to pause. Macklem described the current rate as “about the right level,” suggesting that the aggressive easing cycle of late 2024 and early 2025 has concluded.
However, the Canadian outlook is heavily shadowed by external threats. The Bank explicitly noted that the economy must navigate a “structural transition” amid rising global trade tensions. While the domestic data is strong, the dependence on US trade relations means that Canadian businesses are not insulated from the volatility being priced into American markets.
Market Implications: The Liquidity Gap
The divergence between a cutting Fed and a holding BoC creates a complicated environment for cross-border capital flows. More importantly, the “stop-and-go” nature of current policy guidance forces traditional lenders into a defensive posture. Banks dislike uncertainty. When the Fed signals a pause due to tariff concerns and the BoC cites structural transitions, credit committees at major financial institutions tend to freeze approval processes or demand perfect covenants.
What this means for borrowers: We are entering a period where headline rates may stabilize, but access to capital will remain restrictive. The spread between policy rates and effective commercial lending rates is likely to widen as banks price in the macroeconomic risks of 2026.
The Bond Capital View
The market is pricing in a “soft landing,” but the data suggests we are entering a phase of “heightened vigilance.” Public markets are reacting to the Fed’s hesitation, and we anticipate traditional credit boxes will shrink in response to the split voting record and tariff rhetoric.
For mid-market companies, reliance on bank debt alone is a risk factor in this environment. Bond Capital maintains that in periods of policy fog, private credit provides the necessary clarity. While public institutions debate the path of interest rates, we focus on the immediacy of liquidity, providing stable capital structures that allow businesses to operate through the uncertainty of the coming year.
