A Tale of Two Economies
As 2025 draws to a close, North America’s central banks have adopted diverging paths, reflecting unique economic pressures on either side of the border. On Wednesday, the Federal Reserve reduced its benchmark interest rate by 25 basis points to a range of 3.50% to 3.75%—its third consecutive cut. Conversely, the Bank of Canada (BoC) opted to hold its policy rate steady at 2.25%, citing unexpected economic resilience.
While headline rates are stabilizing or dropping, the underlying narrative from policymakers is one of caution. Both Jerome Powell and Tiff Macklem highlighted significant uncertainty regarding labor markets and trade policies, suggesting that the era of aggressive easing may be pausing. For business owners and CFOs, the message is clear: while the cost of money is adjusting, access to capital through traditional channels may remain restricted as banks digest these mixed signals.
The Federal Reserve: A Divided House
The Federal Reserve’s decision to cut rates was driven by a softening U.S. labor market. Chair Jerome Powell noted that job growth might be weaker than headline numbers suggest, prompting the central bank to prioritize employment stability over inflation fighting for the moment. However, this decision was not unanimous. The December meeting saw three dissenting votes—the highest number since 2019—highlighting deep internal disagreement on the path forward.
Crucially, the Fed signaled a slowdown in its easing cycle, projecting just one rate cut in 2026. With inflation still hovering above target and potential tariffs from the incoming Trump administration threatening to spur a “one-time price increase,” the Fed is positioning itself to “wait and see.”
- Key Data Point: Fed Funds Rate now 3.50%–3.75%.
- The Signal: Downside risks to employment are rising, but inflation fears linger.
The Bank of Canada: Resilience Amidst Friction
North of the border, the Bank of Canada held its overnight rate at 2.25%. Governor Tiff Macklem emphasized that the Canadian economy has proven hardier than expected, with Q3 GDP growing by 2.6%. Despite severe tariffs on steel, aluminum, and lumber, the broader economy has absorbed the shock, allowing the BoC to pause its cutting cycle to assess the impact of structural trade adjustments.
However, Macklem explicitly warned that “uncertainty remains high,” particularly regarding the upcoming review of the Canada-United States-Mexico Agreement (CUSMA). This trade friction creates a complex environment where economic data is volatile, making it difficult for lenders to forecast long-term borrower health.
The Consequence: The Sensitivity of Credit Boxes
For the middle market, the divergence in central bank policy creates an environment of hesitation. Traditional lenders—commercial banks—operate effectively when forward guidance is clear. Today, with the Fed divided and the BoC grappling with trade war volatility, that clarity is absent.
Implication for Borrowers: A lower policy rate does not automatically equate to easier loan approval. When uncertainty creates “fog” on the macro horizon, bank credit committees typically tighten their lending criteria to insulate their balance sheets from potential shocks. We are seeing a disconnect where capital is theoretically cheaper, but harder to access for businesses in transition.
At Bond Capital, we interpret this volatility differently. We recognize that businesses must continue to execute on growth strategies regardless of the macro noise. While public markets and traditional banks pause to seek perfect clarity, private credit remains a vital tool for providing the certainty of execution and liquidity required to navigate this structural transition.
