North American Monetary Policy Diverges
For the first time in this cycle, we are witnessing a distinct decoupling of North American monetary policy. On Wednesday, December 10, the Federal Reserve cut its benchmark interest rate by 25 basis points to a range of 3.50% to 3.75%. Simultaneously, the Bank of Canada (BoC) chose to hold its key overnight rate steady at 2.25%.
This divergence signals a critical shift in the economic narrative. For the past year, the story has been a synchronized battle against inflation. Now, the narrative is fracturing based on differing domestic realities: the U.S. is fighting to save a softening labor market, while Canada is pausing to assess unexpected economic resilience amidst looming trade uncertainties.
The Fed: Protecting the Labor Market
Federal Reserve Chair Jerome Powell announced the third consecutive rate cut, lowering the target range to 3.50%–3.75%. The decision was driven by cracks in the U.S. employment data. Powell explicitly stated that the central bank is acting to keep the labor market intact, noting that job growth may be weaker than headline numbers suggest—potentially even negative when accounting for revisions.
However, the Fed signaled this may be the last cut for the immediate future. Projections indicate a “hawkish pause,” with officials penciling in only one reduction for 2026. Inflation remains sticky and above the 2% target, complicated by the potential inflationary impact of incoming tariffs.
The Bank of Canada: Calculated Patience
North of the border, Governor Tiff Macklem maintained the policy rate at 2.25%. This decision surprised some market observers who expected Canada to mirror the U.S. easing. The Bank’s rationale relies on data showing the Canadian economy is proving surprisingly robust.
Third-quarter GDP grew by 2.6%, beating expectations, and the unemployment rate dropped to 6.5%. Macklem characterized the current 2.25% rate as “about the right level” to support the economy through a “structural transition.” The BoC is adopting a wait-and-see approach, assessing how the economy absorbs the shock of U.S. trade tariffs on steel, aluminum, and lumber before making further moves.
Market Implications: Uncertainty Tightens Credit
While the Bank of Canada’s hold at 2.25% is historically accommodative, the broader context creates a challenging environment for borrowers relying on traditional financing. The headlines may suggest stability, but the underlying reality is one of precariousness.
The Trade War Factor: The BoC explicitly mentioned that uncertainty regarding the Canada-U.S.-Mexico Agreement (CUSMA) and new tariffs is weighing on business investment. Traditional banks hate uncertainty. When the macroeconomic outlook is clouded by trade disputes and structural transitions, Schedule A banks inevitably tighten their credit boxes. They act defensively, preserving capital rather than deploying it into the mid-market.
Furthermore, the Fed’s signal of a pause in 2026 suggests that the era of aggressive easing is over. We are entering a period of “higher-for-longer” relative to the rock-bottom rates of the past decade. This creates a friction point where businesses need capital to pivot or grow, but traditional lenders remain paralyzed by macro ambiguity.
The Bond Capital View
The divergence between the Fed and the BoC highlights a complex environment. A rate hold does not equate to easy money. In fact, when combined with trade volatility, it often leads to a contraction in liquidity from conventional sources.
At Bond Capital, we look beyond the headline rate. We understand that businesses cannot press pause on their operations just because Central Banks have decided to wait for more data. While banks retreat to analyze the fallout of tariff negotiations, Bond Capital remains active, focused on the specific creditworthiness of the business rather than the noise of the macro cycle.
