On 29 October 2025, the US Federal Reserve and the Bank of Canada both cut their key interest rates by 0.25%, aiming to bolster their respective economies amid ongoing strains. This was only the second rate cut in the US this year, compared to four in Canada, highlighting differing economic pressures.
Why the Rate Cuts?
Both central banks cited economic challenges as reasons for easing monetary policy. Fed Chair Jerome Powell indicated the rate reduction was partly to gain more insight into the labour market, which is currently opaque due to the US government shutdown preventing the release of official jobs data. Meanwhile, Bank of Canada Governor Tiff Macklem said current borrowing costs are appropriate despite the damage inflicted by US tariffs.
While domestic pressures differ—rising inflation in the US versus slowing growth in Canada—both countries see lower rates as a tool to stimulate economic activity. However, these rate cuts did not significantly move stock markets in either country, and the overall economic outlook remains uncertain.
High Hopes and Cautious Optimism
In the US, Fed Chair Powell remains cautious about future rate decisions. He stated that he would not commit to a December rate cut until the data blackout ends and clearer economic indicators are available. The Federal Open Market Committee (FOMC) members are awaiting more guidance, with some dissenters suggesting a larger cut of 0.5%, while others favour a pause.
Meanwhile, US President Donald Trump has recently returned from a high-stakes diplomatic tour in Asia, which included a meeting with Chinese President Xi Jinping. Trump claimed they agreed on almost everything, hinting at a forthcoming trade deal.
Trade Deal in the Offing?
US and Chinese negotiators are optimistic about the prospects of improved trade relations. Trump indicated that both sides are close to resolving key issues, including easing restrictions on Chinese exports of rare earth minerals and resuming large-scale US soybean purchases. The US has also promised to reduce tariffs on Chinese goods, which could significantly impact global trade dynamics.
China echoed this optimism, with Beijing stating that the US and China have 'good prospects for cooperation.' Both nations expressed a shared interest in addressing issues such as the fentanyl crisis, with China's Foreign Ministry emphasising a preference for dialogue over confrontation.
The coming weeks will reveal whether these diplomatic efforts translate into tangible trade agreements, offering a potential boost to global markets and economic confidence.
US-Canada Trade Relations and Domestic Politics
In a notable development, the US Senate passed legislation on midweek to eliminate tariffs on Canadian imports. Four Republicans joined 46 Democrats in voting in favour, signalling bipartisan support for improved trade relations. President Trump responded by cancelling planned trade talks and imposing an additional 10% tariff on Canadian goods, citing a recent anti-tariff TV ad in Ontario. Despite this, many in Trump's party remain committed to free trade principles.
Implications of Rate Cuts
Economists generally agree that lower interest rates make borrowing cheaper, encouraging consumers and businesses to spend more. Homeowners with variable-rate mortgages and small business owners benefit immediately from rate cuts, which can stimulate economic growth.
However, Bank of Canada's Macklem remains cautious, expecting only modest growth for the remainder of 2025, with some improvement anticipated in 2026. He also highlighted that the ongoing trade conflict with the US has dampened Canada's economic prospects.
The Next Trade Deal?
Canadian Prime Minister Mark Carney met with President Trump during an APEC dinner in South Korea. The meeting was described as cordial, with Trump noting that Carney indicated Canada is "ready when appropriate" to resume trade negotiations. This could mark the next significant step towards a new trade agreement, potentially easing ongoing tensions and boosting economic prospects for both nations.
The rate cuts by the US Federal Reserve and the Bank of Canada reflect ongoing efforts to stimulate growth amid uncertain global and domestic economic conditions. While positive diplomatic signals from the US and China offer hope for improved trade relations, significant challenges remain. The coming months will be critical in determining whether these policy moves and diplomatic efforts translate into sustained economic recovery.
