CANADA ECONOMICS FEATURE: CIBC On the BoC and Fed; "Same Road, Diferent journeys

02:32 PM EDT, 09/12/2025 (MT Newswires) -- Next Wednesday, the Bank of Canada and the Fed will both deliver interest rate relief after what "history will judge to be a relatively brief pause", said CIBC's Ali Jaffery, before he added: "A single rate cut isn't enough to meaningfully affect economic outcomes these days, so we expect to hear dovish talk aimed at solidifying expectations for another cut in October, as both central banks regain confidence in adopting a forward-looking approach. For the Fed, it wouldn't surprise us if one or two Governors dissent for a bigger cut, perhaps more to raise their profiles with the White House than to shift policy."

Although the market isn't convinced, CIBC sees a stronger case for rate cuts in Canada than in the U.S., noted Jaffery, who wrote today's version of CIBC's regular 'The Week Ahead' column.

Jaffery said: "The American economy is just starting to show some signs of slack, whereas Canada has

moved deeper into slack conditions throughout the year, with a real time output gap closer to minus 1.5%, just a few threads above recession. That growing slack has helped push some measures of wage growth below inflation already. "Buy Canadian" sentiment has given consumer spending a lift, but with winter travel in Canada less attractive, that boost will fade.

"Enough dust has also settled to allow Governor Macklem to focus on what lies ahead and be less data-dependent. Unfortunately, that outlook isn't particularly encouraging. The global economy is slowing, as is the U.S., and a sweeping trade deal does not seem to be on the horizon for Canada. Despite the press conferences and major announcements, a big fiscal boost to change Canada's fortunes in the next few quarters is also unlikely. Even if the approval process is speeded up, getting the shovels in the ground for major projects will take time and have that work appear in the data.

"For the BoC, with slack sticking around for a while, the inflation outlook looks less concerning. Moreover, some of the forces that previously pushed underlying inflation higher are now reversing. The CAD has settled in a range not far from where it was before trade worries surfaced, and counter-tariffs are

gone. While pricier U.S. imports could spill over into Canadian inflation, there is a reasonable case for the BoC to "look through" such price rises. Research presented at Jackson Hole underscores that anchored inflation expectations and inflationfighting credibility allow policy makers to weather temporary bouts of inflation, and prevent higher inflation from becoming entrenched (Nakamura et al, 2025). Markets and businesses understand that if things really get out of hand, the central bank will act to restore price stability, and so they ultimately make decisions roughly consistent with 2% inflation. With headline

inflation near target and businesses' inflation expectations steady, Canada appears to be passing that test.

"Those in the Fed cheering on rate cuts are leaning on similar arguments, but the case for Fed cuts is weaker on those grounds. For one, PCE inflation hasn't returned to target sustainably in the post-pandemic period, and it's not clear that after a one-time price level shock starting from above 2%

inflation that we land back on 2% when it's all said and done. Also, the White House is now attacking the Fed more often than fantasy football managers surf the waiver wire after week one. That does not inspire confidence in the Fed's future inflation fighting chops.

"It's true that America's job market is on a cooling trajectory, but it's not flashing red like in Canada. A 4.3% jobless rate is only a shade above the Fed's own estimate of the long-term unemployment rate, and the step down in payrolls reflects slowing demand, but also slower population growth. The cooling in the job market hasn't extended to worker pay, as the Fed's preferred measure of wage growth has actually reaccelerated close to 4%, raising the risk of a feedback loop between wages and prices. At the end of the day, the most persuasive economic argument for the Fed to cut rates now is to bring rates closer to neutral, but the inflation outlook and the bending-but-not-breaking state of the economy would suggest

doing so gradually. It's difficult to justify consecutive rate cuts without factoring in politics.

"The real challenge for the U.S. will be when rates get to neutral territory, likely around 3.5%. At least on economic grounds, stubborn inflation should be a major stumbling block to bringing rates into an accommodative zone, even if the job market falters further. Canada, on the other hand, likely should have

already been headed towards accommodative policy some time ago and the debate up north could soon be about how low they need to go. So while the Bank of Canada and the Fed may appear to be traveling the same road next week when rates come down, their journeys, shaped by differing economic landscapes and destinations, remain very different."

Price: 109.63, Change: -0.41, Percent Change: -0.37

MT Newswires does not provide investment advice. Unauthorized reproduction is strictly prohibited.