Rates, Politics, and Inflation: What’s Next for the Fed and BoC?

There’s been renewed focus this week on U.S. Federal Reserve policy, especially following new inflation data and public pressure from President Trump, who is calling for a sharp cut in interest rates to 1%. Trump argues this would ease government borrowing costs amid rising deficits from his tax cuts and spending plans.

However, a 1% Fed policy rate is historically associated with economic crises, not strength. Past instances, like the aftermath of the dot-com bust, the 2008 financial crisis, and the COVID-19 shutdown, saw rates drop to these levels amid severe economic stress. Today’s economy, in contrast, remains on stable footing, with low unemployment and inflation still above the Fed’s 2% target.

Economists warn that slashing rates too deeply in this environment could reignite inflation and send the wrong message to financial markets, undermining the Fed’s credibility. A dramatic cut could be viewed as politically motivated, rather than a measured response to economic data, potentially rattling investor confidence and inflating long-term borrowing costs. While there's some room for easing from the current 4.25%-4.50% range, the kind of aggressive action Trump is pushing for appears unlikely unless a downturn emerges.

In Canada, June’s inflation report came in hotter than expected, reinforcing expectations that the Bank of Canada will hold rates steady at its July 30 meeting. The data also makes a September rate cut less likely unless core inflation drops meaningfully over the next two months. So far, that threshold hasn’t been met.

In summary, both central banks appear cautious and data-driven heading into the second half of 2025. While Powell maintains some flexibility to adjust policy if needed, neither the Fed nor the Bank of Canada appears poised for dramatic action in the near term unless inflation or growth shifts significantly.

In the meantime, staying disciplined and focused on high-quality, diversified investments remains essential in navigating market uncertainty.