The Great Decoupling: Fed Cuts, BoC Holds
The era of synchronized global monetary policy came to a sharp halt on December 10, 2025. In a move that highlights the growing economic divergence between North America’s two largest economies, the Federal Reserve cut interest rates primarily to defend a softening labor market, while the Bank of Canada held firm waiting to see if recent economic resilience is sustainable.
For business owners and CFOs, the headline rates matter less than the credit conditions they create. While the Fed lowered its benchmark to a range of 3.5% to 3.75%, the internal division at the central bank—marked by three dissenting votes—signals rising uncertainty. Meanwhile, the Bank of Canada maintained its overnight rate at 2.25%, citing stronger-than-expected GDP growth of 2.6% in the third quarter.
The Signal in the Noise: Division Breeds Caution
The most critical data point from December was not the rate cut itself, but the dissension behind it. Chair Jerome Powell faced the highest number of dissenting votes since 2019, with policymakers split on whether to prioritize fighting inflation or saving jobs. This lack of consensus is a flashing warning sign for commercial banks.
When central bankers are divided, traditional lenders retreat to safety. The Fed’s projection of only one single rate cut for the entirety of 2026 shattered the market’s hope for a return to cheap capital. Similarly, while the Bank of Canada acknowledged inflation is near its 2% target, Governor Tiff Macklem’s decision to hold demonstrates a reluctance to declare victory prematurely.
- United States: Rate cut of 25 bps; Focus shifts to “under the surface” labor weakness.
- Canada: Rate hold at 2.25%; Focus remains on verifying the durability of Q3’s GDP rebound.
- The Outlook: Both central banks signal a “wait-and-see” approach for Q1 2026.
The Bond Capital Perspective: Volatility Creates Opportunity
A rate cut does not immediately translate to easier bank loans. In fact, in an environment characterized by trade protectionism and policy divergence, Tier 1 banks often tighten their credit boxes to insulate their balance sheets from the very volatility central banks are trying to manage.
We are currently seeing a classic “Risk-Off” behavior in public credit markets despite the Fed’s easing. The lag effect of monetary policy means that liquidity constraints will persist well into 2026. While traditional lenders pause to reassess their risk models in light of the Fed’s internal division, Bond Capital remains active. We view this divergence not as a reason to retreat, but as a mandate to provide certainty. For borrowers, the strategic move is to secure liquidity now, rather than waiting for a banking consensus that may not arrive until late next year.
