U.S. Federal Reserve, Bank of Canada keep key interest rates steady as expected

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01/28/26 14:05

U.S. Federal Reserve holds rate steady in first policy meeting of 2026

- Reuters

The U.S. Federal Reserve held interest rates steady on Wednesday, citing still-elevated inflation alongside solid economic growth, and giving little indication in its latest policy statement of when borrowing costs might fall again.

“Economic activity has been expanding at a solid pace,” Fed policymakers said in the statement after voting 10-2 to hold the U.S. central bank’s benchmark interest rate in the 3.50 per cent to 3.75 per cent range following a two-day meeting.

Both Governor Christopher Waller, a contender to replace Fed Chair Jerome Powell when his term as central bank chief ends in May, and Governor Stephen Miran, on leave from his job as an economic adviser at the White House, dissented in favor of a quarter-percentage-point rate cut.

The Fed’s statement offered no hint about when another reduction in borrowing costs might come, noting that “the extent and timing of additional adjustments” to the policy rate would depend on incoming data and the economic outlook.

Meanwhile, inflation “remains somewhat elevated,” the central bank said, while the job market has “shown some signs of stabilization.”

Though the Fed noted that “job gains have remained low,” it also removed language from its prior statement saying that downside risks to employment had risen - an indication policymakers as a group are becoming less worried about a rapid downturn in the labor market.

Fed policymakers ahead of this week’s meeting had largely characterized the job market as roughly in balance, with smaller gains matching the slower growth in the numbers of those seeking employment as a result of the Trump administration’s stricter immigration policies. The unemployment rate in December fell to 4.4 per cent.

Mr. Powell is scheduled to hold a press conference at 2:30 p.m. ET to discuss the policy statement and economic outlook.

Read more on today’s U.S. Federal Reserve decision.

01/28/26 13:00

Opinion: Food inflation will test Bank of Canada’s limits

- Jeremy Kronick and Steve Ambler

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On Wednesday, to the surprise of few, the Bank of Canada held its policy interest rate at 2.25 per cent. We agree with the decision, though believe food price increases are likely to pose an ongoing challenge for the bank. It could test the limits of monetary policy.

When the bank leaves its policy rate unchanged and the rate sits in the so-called neutral rate range – where the bank is neither trying to stimulate nor slow the economy – the data are often conflicting. This time was no different.

Headline inflation (the change in the consumer price index over the preceding 12 months) nudged up to 2.4 per cent in December from 2.2 per cent in November, but it was 0.4 percentage points above the bank’s 2 per cent target.

On the other hand, fourth-quarter GDP growth appears sluggish, with the likely best-case outcome seeing the Canadian economy eke out a weakly positive gain when Statistics Canada releases the data at the end of February. Moreover, labour growth stagnated in December and the unemployment rate increased to 6.8 per cent, up from from 6.6 per cent.

This kind of conflicting data makes a strong case for a hold.

Read the full column here.

01/28/26 12:20

What’s next?

- Mark Rendell

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• The U.S. Federal Reserve’s rate announcement is at 2 p.m. ET today, followed by a press conference by Chair Jerome Powell at 2:30 p.m. The Fed is expected to leave interest rates unchanged, keeping the target range for the federal funds rate at 3.5 to 3.75 per cent.
• The Bank of Canada’s next interest rate decision is on March 18. You can find the other rate decision dates here.
• We’ll get a better sense of how the Canadian economy was faring through the end of 2025 later this week, with Statistics Canada publishing November international trade and GDP data on Thursday and Friday. January inflation numbers will be released on Feb. 16.

01/28/26 11:45

With rates on hold, U.S. trade negotiations will likely shape Canada’s spring housing market

- Erica Alini

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For the past year and a half, scores of prospective first-time homebuyers have held back, waiting for both home prices and borrowing costs to reach bottom. With rates now on hold, many of them may finally decide to jump into the upcoming spring housing market.

But how many will actually pounce may depend on the fate of the renegotiation of the North American free-trade agreement, the USMCA, which is scheduled for a review in July.

“A further degradation of the relationship with the U.S. or a clear indication that there would be no reasonable renewal of our trade agreement with Mexico and the U.S. could actually act as a damper on the spring market,” said Philip Soper, CEO of Royal Le Page.

Still, barring any significant trade shocks, Mr. Soper expects homebuyers to come out of hibernation.

Employment levels among the key 25-to-54-year-old demographic are healthy, Canadians’ savings rates remain strong and far above prepandemic levels, and inflation is reasonable. Yet, especially in larger housing markets, the volume of home sales has remained well below historical norms.

It means, “there’s a lot of people that need housing and relatively few transactions occurring,” Mr. Soper said.

But don’t expect the release of that pent-up demand to result in bidding wars and escalating home prices. The market is well stocked with homes for sale and more will come online as the weather warms.

Instead, Mr. Soper expects prices to decline by another 3 to 4 per cent in Toronto and Vancouver this year, with most smaller markets registering low, single-digit price gains.

01/28/26 11:12

Macklem on the big picture forces shaping the economy

- Mark Rendell

“It is important to step back from the daily noise. Some things are clear. It’s clear that the era of open rules-based trade with the United States is over. It’s clear that our population growth has come down and is going to stay lower. It’s clear that new technologies, particularly rapid advances in AI, have the potential to have a significant impact on businesses on the economy. Whether you’re a business trying to chart the way forward, or you’re a policymaker, those things are clear. The Canadian economy needs to adjust to those things. We think that has started. We think it’s going to take some time, and through that period, growth will be modest … the more we adjust, the stronger the economy can be, the more resilient the economy can be.”

01/28/26 11:09

Macklem on the rate decision and uncertainty

- Mark Rendell

“Bottom line is we agreed that the current policy rate is appropriate if the economy evolves broadly in line with the outlook we just published… The clear consensus was it’s very difficult to predict either the direction or the timing of the next move in our policy rate. To put it a bit more technically, in order to assign probabilities as to the direction of the next move… you need to be able to assign probabilities to the risks, and I think the way we were feeling is, given high uncertainty, that’s difficult. We are monitoring those risks very closely, and if a new shock comes along, or an accumulation of evidence that materially changes our outlook, we’re prepared to respond.”

01/28/26 11:04

Macklem on currency markets

– Matt Lundy

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“In the last couple of weeks, you’ve seen some renewed U.S. dollar weakness, and so many currencies, including the Canadian dollar, are appreciating somewhat against the U.S. dollar. What’s driving that? I think it’s largely geopolitical events. … International investors, they still want exposure to U.S. equities. U.S. equity markets have been strong, but that safe haven role of the U.S. dollar has been dented. People don’t want as much exposure to the U.S. dollar. They’re hedging more of that. … And at the same time, you’re seeing other safe havens, most notably gold, up a lot.”

01/28/26 11:01

Macklem on U.S. trade

– Matt Lundy

“It’s pretty clear that the days of open rules-based trade with the United States are over. We need to get on and adjust to that.”

01/28/26 10:59

Macklem on threats to the U.S. Fed’s independence from Trump

- Matt Lundy

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“The threat to independence of the central bank in the United States is one thing that has sort of been contributing to this sense of uncertainty. Look, why did I make a point of commenting on Chairman Powell and the U.S. Fed? The simple reason is the U.S. Federal Reserve is the biggest and most important central bank in the world. And we all need it to work well. A loss of independence of the Fed would affect us all, and for Canada, our financial markets are particularly integrated with the United States, so it would particularly affect us. It’s hard to predict exactly what this would look like, but keeping the Fed operating independently, it’s good for Americans, it’s good for Canadians. … What does independence do? It provides central banks with the space to take difficult decisions that benefit the economy, benefit the citizens of that country over the medium-term.”

01/28/26 10:56

Macklem on rising geopolitical uncertainty

- Matt Lundy

“There’s a sense that geopolitical risks are heightened. I’m not going to go through every event, but the month of January has been pretty packed with new elements, new geopolitical risks. Through the last spring, there were some very big changes, some pauses, some reintroductions and deals. Through the summer, I don’t want to say uncertainty was low, but you saw a little more stability. Recently you’ve seen more unpredictability in U.S. policy, with all sorts of threats, including on Canada. And then I think the CUSMA review is coming more into focus. It’s now 2026; it is under review this year. So those are really the key elements that have increased uncertainty. “

01/28/26 10:54

Macklem on whether rates hinge on the USMCA review outcome

- Matt Lundy

“What we are saying is that uncertainty around our forecast is unusually high. There are a number of risks and uncertainties. Geopolitical risks have increased, they’re heightened. U.S. trade policy remains highly unpredictable, and for Canada, what the outcome is of the review of CUSMA is an important risk to our projection. What we have built into our projection is that tariffs that are currently in place, remain in place. … We go through a number of possible outcomes for CUSMA. I would stress that we’ve done a number of scenarios.”

01/28/26 10:46

Key quotes from Tiff Macklem’s press conference opening statement

- Mark Rendell

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On interest rates:

“Considering both our baseline forecast and the risks, Governing Council discussed the future path of monetary policy. While Council judges the current policy rate is appropriate based on our outlook, the consensus was that elevated uncertainty makes it difficult to predict the timing or direction of the next change in the policy rate.”

The outlook for economic growth:

“Tariffs and uncertainty continue to disrupt the Canadian economy. After a strong third quarter, economic growth likely stalled in the fourth quarter. Exports continue to be buffeted by U.S. tariffs, while domestic demand appears to be picking up. Household spending is expected to continue growing moderately, supported by past cuts in interest rates and rising disposable incomes. U.S. tariffs and related uncertainty have held back business investment. But we expect some modest strengthening in investment as businesses adjust to the new trade environment and governments increase infrastructure spending.”

On the labour market:

“The impact of US tariffs can also be seen in the labour market. Employment weakened in the first half of 2025 as sectors hit hard by U.S. tariffs cut production and jobs. In recent months, overall employment has risen, led by hiring in services like health care, and slowing population growth is reducing the number of new entrants into the labour market. Still, the unemployment rate remains high at 6.8%, youth unemployment is particularly elevated, and relatively few businesses say they plan to hire more workers in coming months.”

On inflation:

“Turning to inflation, it averaged 2.1 per cent last year, and has now been within the 1 per cent to 3 per cent band for two years. If we focus on recent movements, CPI inflation rose to 2.4 per cent in December, boosted by base-year effects linked to last winter’s GST/HST holiday. The Bank’s preferred measures of core inflation have eased from 3 per cent in October to around 2.5 per cent in December. The Bank expects CPI inflation to stay close to the 2 per cent target over the projection as tariff-related cost pressures are offset by excess supply.”

On uncertainty:

“Uncertainty around this outlook is unusually high. Geopolitical risks are elevated and the upcoming review of the Canada-United States-Mexico Agreement is an important risk to the outlook. It’s also too early to tell how well the Canadian economy will adjust to current tariffs and ongoing uncertainty. The transition to the new trade environment could be smoother than we expect, with stronger business and household spending. Alternatively, the labour market could weaken further as trade impacts deepen, leading to lower household spending. Financial conditions could also tighten if volatility returns to markets.”

On the limits of monetary policy:

“Monetary policy cannot compensate for the structural damage caused by tariffs, and it cannot target hard-hit sectors of the economy. But it can play a supporting role, helping the economy through this period of structural change, while maintaining inflation close to the 2 per cent target.”

01/28/26 10:38

The bank’s new GDP and inflation forecast

- Mark Rendell

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The Bank of Canada published a new forecast for economic growth and inflation on Wednesday in its quarterly Monetary Policy Report.

• The bank expects gross domestic product to increase 1.1 per cent in 2026 and 1.5 per cent in 2027. This is largely unchanged from the October MPR.
• The bank now thinks there was zero GDP growth in the fourth quarter of 2025, although it significantly revised up the third-quarter GDP growth number. Quarterly growth is highly volatile, given swings in exports and imports and changes in company stockpiling.
• The bank sees inflation easing in the coming quarters, and remaining close to the 2-per-cent target through 2026 and 2027. Tariffs and supply-chain disruptions continue to put upward pressure on prices, but the impact of this is diminishing and slack in the economy is putting downward pressure on inflation. Food and rent inflation remains elevated, but the bank expects both to ease in coming quarters.

01/28/26 10:34

How economists are reacting to today’s BoC hold

- Darcy Keith

Here’s how economists are reacting in written commentaries issued after the rate decision:

Avery Shenfeld, chief economist, CIBC Economics

“There won’t be anyone surprised by the Bank of Canada’s well-telegraphed decision to keep rates on hold today, or its assessment that rates are at the right level if their forecast pans out. They remain firmly neutral on where things go from here, saying that “it’s difficult to predict the timing or direction of the next move.” But if there’s a slight leaning here, it’s still towards some worries on the growth front due to uncertainties on trade, and a bit more comfort that underlying inflation is decelerating. The bank hasn’t made any major changes in its forecasts, with an upside surprise in Q3 offset by a stall in growth in Q4 of 2025. With both historical actual and potential growth revised higher, the output gap in Q4 is in the range of -1.5 per cent to -0.5 per cent, unchanged from October’s estimate. We’ll stick to our forecast for no interest rate moves by the bank in 2026, but see the odds of a further cut as more likely than a hike, given the potential minefield in trade negotiations ahead, and a starting point that still has significant economic slack.”

Bradley Saunders, North America economist, Capital Economics

“The Bank of Canada’s largely unchanged economic projections are similar to our own, although we think the slow pace of economic growth this year will help ease core price pressures sooner than policymakers expect. On the whole, however, there is nothing in the bank’s latest communications to suggest changes to the policy rate will be forthcoming any time soon. …

Notably, Macklem’s statement mentions for the first time that “elevated uncertainty makes it difficult to predict the timing or direction of the next change in the policy rate.” This will catch the eye of investors holding more hawkish views, who have moved to price in roughly 10bp of hikes by the end of the year. We agree that the policy rate’s next move will be upwards, but we do not expect this to come until 2027, providing that CUSMA renegotiations have been wrapped up by then.”

Andrew Hencic, director and senior economist, TD Economics

“A widely expected hold, but the emphasis on uncertainty in the statement was prominent. The bank emphasized the data dependent approach in the coming months as the [USMCA] review and geopolitical events could shift the outlook in 2026. That said, our baseline outlook is relatively in line with the BoC – below-trend growth helping inflation continue to moderate. Under these conditions we expect the BoC to stay on the sidelines in the coming months.”

01/28/26 10:25

Where to from here? It’s tough to say

- Matt Lundy

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There weren’t many surprises in Bank of Canada Governor Tiff Macklem’s opening statement on Wednesday. The outlook for economic growth and inflation is roughly the same as it was in the fall. The benchmark interest rate – still at 2.25 per cent – is considered “appropriate” for an economy both stung by tariffs, but growing modestly. And of course, the outlook is hazy: The word “uncertainty” appeared seven times in Mr. Macklem’s statement.

Financial markets haven’t reacted much to Wednesday’s decision. Investors think there’s a decent chance that the Bank of Canada raises interest rates once by the end of the year, with those views subject to revision.

The path forward for interest rates could hinge, to a great deal, on the future of North American trade. The United States-Mexico-Canada Agreement is up for review this year, and the outcome is highly uncertain – everything from a U.S. withdrawal to a renewal, potentially with major tweaks to trade policy.

As the Bank of Canada has frequently pointed out, the trade war has delivered structural damage to the economy. Gross domestic product is on a weaker track than previously projected, and the gap won’t be closed.

Suffice to say, a bad outcome in the USMCA review will bring more damage. But the central bank has plenty of room to cut rates to support the economy – even if that’s not the baseline assumption out of Bay Street.

01/28/26 10:16

Bank of Canada’s latest MPR forecast sees muted growth ahead

- Mark Rendell

After a healthy rebound in gross domestic product growth in the third quarter of 2025, the bank now thinks GDP growth flatlined in the fourth quarter – with volatility driven by sharp swings in trade and business stockpiling.

The bank’s new forecast, published Wednesday in its quarterly Monetary Policy Report, sees muted growth ahead, as economic activity is held back by trade uncertainty and slow population growth.

GDP is expected to grow 1.1 per cent in 2026 and 1.5 per cent in 2027, which is largely unchanged from the last projection in October.

This forecast remains highly conditional on U.S. trade policy, particularly the outcome of the upcoming review of the North American free-trade pact, which Mr. Macklem flagged as an “important risk to the outlook.”

There are also questions about how well, and how quickly, Canadian businesses and consumers can adjust to a world where preferential access to the U.S. market is no longer guaranteed. “The transition to the new trade environment could be smoother than we expect, with stronger business and household spending,” Mr. Macklem said.

“Alternatively, the labour market could weaken further as trade impacts deepen, leading to lower household spending. Financial conditions could also tighten if volatility returns to markets.”

01/28/26 10:07

Markets react slightly to today’s expected BoC hold

- Darcy Keith

Hard to detect even a tremor in markets in reaction to this widely expected decision today. The Canadian dollar did tick up slightly, to a more than one-year high of 73.87 cents US, but don’t read much into that: the U.S. dollar was also ticking lower against major currencies as that high was reached.

Canada’s two-year bond yield was barely changed on the news too, up just slightly for the session and well within ranges of the past week.

And we’re seeing that lack of movement in the bond market play out in implied interest rate probabilities for where rates go from here. Overnight index swap markets still imply a consensus among traders that the Bank of Canada will remain on hold throughout the rest of this year - although there is a very slim probability priced in for a cut in April or June (around 4 per cent) and more robust odds of a rate hike by October (about 30-per-cent odds).

01/28/26 09:50

Bank of Canada keeps key interest rate steady at 2.25%

- Mark Rendell

The Bank of Canada kept its benchmark interest rate steady on Wednesday and offered little guidance about where monetary policy will go next as U.S. protectionism continues to reshape the Canadian economy.

As widely anticipated, the bank’s governing council kept the policy rate at 2.25 per cent, where it has been since October.

Governor Tiff Macklem said this level “remains appropriate” given the bank’s outlook for slow, but positive economic growth, and subdued inflation. But he was non-committal about how long the bank would remain on hold or what its next move might be.

“Uncertainty around our forecast is heightened and the range of possible outcomes is wider than usual. U.S. trade policy remains unpredictable, and geopolitical risks are elevated,” Mr. Macklem said, according to the prepared text of his press conference opening statement.

“The consensus was that elevated uncertainty makes it difficult to predict the timing or direction of the next change in the policy rate,” he added.

Financial markets expect the bank to remain on hold through 2026.

Read more about today’s Bank of Canada decision.

01/28/26 09:15

Fed expected to hold as well, despite mounting political pressure

- Mark Rendell

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The action will shift to Washington later this afternoon, where the U.S. Federal Reserve will announce its own interest rate decision against the backdrop of intense political pressure from the White House.

Like the Bank of Canada, the Fed is widely expected to remain on hold, keeping the target range for the federal funds rate at 3.5 to 3.75 per cent. (The Fed targets a range, not a single point.)

After cutting rates three times in fall, Fed Chair Jerome Powell said in December that the central bank was now “well positioned to wait and see how the economy evolves from here.” Since then, stronger-than-expected U.S. GDP and employment data has reinforced the case for a hold.

This is unlikely to sit well with U.S. President Donald Trump, who has harangued the Fed for months to lower interest rates further, and taken multiple steps to undercut the central bank’s ability to operate independently.

The President placed a close ally, Stephen Miran, on the Fed board of governors, and tried to fire another Fed board member, Lisa Cook. Earlier this month, Mr. Powell revealed that the U.S. Department of Justice had opened a criminal investigation into his handling of Fed building renovations and his testimony to Congress.

Mr. Powell dismissed the accusations as pretexts. “The threat of criminal charges is a consequence of the Federal Reserve setting interest rates based on our best assessment of what will serve the public, rather than following the preferences of the President,” he said in an extraordinary video released on the Fed’s website.

Financial markets are betting the U.S. central bank will remain on hold for the next three decisions, before cutting again in June. By then, Mr. Trump will have appointed a new and presumably more dovish chair, willing to push for his vision of lower interest rates.

The announcement is at 2 p.m. ET followed by a press conference by Mr. Powell at 2:30 p.m. ET.

01/28/26 08:15

Bay Street expecting a long hold from the BoC

- Mark Rendell

The Bank of Canada sent a clear signal last month not to expect interest rate changes any time soon and Bay Street is running with this narrative.

Interest rate swap markets, which capture expectations about monetary policy, see the bank remaining on hold through 2026, according to Bloomberg data.

Investors think the next move will be a hike rather than a cut. But markets have largely dropped their expectation of a hike this fall. This week, swap market data put the odds of a quarter-point hike by December below 50 per cent.

Likewise, 26 out 35 economists polled by Reuters last week said they expect the central bank to keep interest rates steady this year. Some, however, think the bank could lower rates further if U.S.-Canada trade relations deteriorate. The key thing to watch is the review of the continental trade agreement, the USMCA, which is scheduled to take place by this summer.

01/28/26 07:00

Bank of Canada expected to hold rate at 2.25 per cent

- Mark Rendell

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Bay Street isn’t expecting fireworks from the Bank of Canada today.

Having cut interest rates nine times since the summer of 2024, the central bank effectively hit cruise control last month. It held its benchmark interest rate steady at 2.25 per cent and said that further moves in either direction are unlikely any time soon.

As far as the central bank is concerned, there isn’t a clear rationale for either cuts or hikes right now.

Inflation is running slightly hot, but not enough to really worry central bankers. Economic growth is muted and unemployment is elevated, but the country has not fallen into the recession many economists were expecting this time last year.

The big question mark remains U.S. trade policy, especially the future of the North American free-trade pact, the USMCA, which is up for review this summer.

If the U.S. decides to walk away from the USMCA, the Bank of Canada could cut interest rates further to cushion the blow. However, that’s not the base case currently being priced into markets, which see the bank remaining on hold through 2026.

With no one expecting a move today, Bay Street analysts will mainly be watching Governor Tiff Macklem’s post-announcement press conference for hints about where rates might go from here, and parsing the quarterly Monetary Policy Report, which will contain the bank’s updated economic growth and inflation forecasts.

Read more about today’s expected Bank of Canada decision.

Editor’s note: In a previous version of this article, a photo of Bank of Canada Governor Tiff Macklem from December was incorrectly captioned to state the photo was taken today. The photo has been updated.