Published on: December 11, 2025
The Canadian and US central banks both announced their last policy rate decisions of the year on Wednesday. While the Bank of Canada (BoC) decided to maintain its rate at 2.25%, the US Federal Reserve (Fed) opted for a quarter-point cut, bringing its target range between 3.50% and 3.75%.
BoC Decision
The Canadian central bank justified its decision by invoking the resilience of major global economies against US protectionism and the high level of uncertainty resulting from it. As stated in its latest Monetary Policy Report, the BoC believes that the current policy rate should keep inflation close to the 2% target while helping the Canadian economy navigate through this period of “structural adjustment.”
In a press release, the Governing Council maintains that core inflation remains around 2.5%, but now specifies that “measures of core inflation remain within a range of 2.5% to 3.0%.”
We also noticed a significant change in tone regarding employment: “Canada’s labour market is showing some signs of improvement. Employment has shown solid gains in the past three months and the unemployment rate declined to 6.5% in November.” However, these comments are tempered by repeated references to the difficulties observed in trade-sensitive sectors.
Here are a few observations made by the BoC in its decision.
Optimism or Delusion
The confidence shown by the BoC regarding inflation, and more specifically its ability to achieve price stability, seems excessive to us, to say the least. The central bank expects the current economic slump to roughly offset the cost pressures associated with the reconfiguration of trade, thereby keeping CPI inflation close to the 2% target, which we believe is unrealistic.
In reality, all core inflation indicators are high, and core CPI is expected to jump by at least 0.4 percentage points in April. With nominal wage growth outpacing productivity growth, a mere 0.3 percentage point increase in margins in Canada would be enough to push inflation to 3.0% rather than 2.0%. An inflation rate of 2.0% therefore seems utopian to us, given that investments in Canada will not lead to strong, sustainable productivity growth.
Once again, the Bank of Canada is sticking to its old narrative that the output gap dynamic is driving inflation, which, as we have repeatedly demonstrated, is a miscalculation in the current environment. Putting disproportionate weight on certain factors comes at a cost in the field of monetary policy.
Fed Decision
By lowering its key interest rate for the third consecutive time, the US Federal Reserve is seeking to support a weakening job market. Persistent inflation and delayed economic data complicated its recent decision, leading to greater disagreement than usual within the Federal Open Market Committee (FOMC). Despite the absence of key economic data from the government due to the recent shutdown of US public services, the Fed says it has been closely monitoring the slowdown in monthly job growth and rising inflation.
The FOMC has also made a few changes to its press release since its last decision. The main adjustment relates to the tone used regarding the unemployment rate, which has exceeded long-term estimates in recent months. Essentially, it removed the reference to rates “remaining low,” signalling greater concern about the labour market.
Alongside its decision, the Fed updated its economic projections. Here are some key points regarding the announcement:
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Available data indicate that economic activity has grown at a moderate pace.
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Both total and core inflation has been revised down in 2026.
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GDP has also been revised higher, from 1.8% to 2.3% in 2026.
A Distorted View of Inflationary Forces
The big picture is as follows: the Fed has revised its growth forecasts upwards, lowered its inflation forecasts, and kept its unemployment rate unchanged. We do, however, disagree with its analysis on two points.
Firstly, the Fed still expects the unemployment rate to fall. To determine whether this scenario is the most likely, we took a closer look at hiring rates in the private sector alongside unemployment rates and came to a completely different conclusion. Previous episodes have all shown higher hiring rates in the private sector than before. It should also be noted that the layoff rate is lower than before, although that is not exactly the point.
Secondly, the Fed’s inflation forecasts are not in line with a transitory fiscal impact. Chair Powell has admitted that some members are considering a scenario in which tariffs would not only have a transitory fiscal impact (12 months in accounting terms) but would last longer. Assuming this clearly implies that some companies would attempt to take advantage of tariffs to pass on costs to consumers, thereby increasing their margins.
In fact, it is not possible to increase the impact on consumers when the labour market weakens to the point where real disposable income does not allow for real consumption growth of more than 1% without reducing the savings rate. A weakening labour market is associated with less impact on consumers. Moreover, profit margins are very high, and data showed that companies were willing to absorb part of the tariffs.