Bank of Canada & Federal Reserve Both Cut Interest Rates

The Canadian and U.S. economies have taken a hit from U.S. President Donald Trump’s global tariff initiatives. Both the Bank of Canada and the Federal Reserve have stepped in and cut their key interest rates.

By How Much Did the Bank of Canada Cut Interest Rates?

On September 17, the Bank of Canada reduced its key lending rate, which directly impacts interest rates, by 25 basis points to a three-year low of 2.5%. It was the first interest-rate cut in six months, with the central bank saying it might cut rates again if the Canadian economy continues to face risks.

Economists think the Bank of Canada will announce one more quarter percentage cut this year, taking interest rates down to 2.0%. More cuts could come in 2026.

According to Tiff Macklem, the governor of the Bank of Canada, significant damage from U.S. tariffs means that a lot of economic uncertainty remains. The economy held up well in the opening months after Trump unveiled his tariffs against Canada, but it has weakened over the last two months.

The jobs market has tumbled, losing more than 107,000 jobs. If you exclude the 2020 health crisis, Canada’s unemployment rate has climbed to a nine-year high of 7.1%. During the second quarter, the Canadian economy contracted by 1.6%, with the third-quarter outlook remaining weak as well.

The Bank of Canada will make another interest rate decision when it meets next on October 29. Macklem said that the central bank would pay close attention to exports and how they impact the economy and businesses.

On the same day this month, the U.S. Federal Reserve announced that it was cutting its benchmark interest rate for the first time since December 2024. The U.S. central bank reduced interest rates by 25 basis points to a range of 4.0% to 4.25%. It was its first interest-rate cut announced in 2025.

The Federal Reserve also signaled that two more 25-basis-point cuts would come when it meets next in October and December. This would take U.S. interest rate down to a range of 3.5% to 3.75%.

How Will This Impact Stocks?

Investors on both sides of the border responded positively to the interest-rate cuts and outlook for additional reductions later this year, with the TSX, S&P 500, Nasdaq, and Dow Jones Industrial Averages all hitting record highs.

Some money makers said that the moves to the upside were just a “honeymoon rally,” but others think the stock markets could continue to rally significantly higher. While the S&P 500 trades at roughly 23 times forward earnings, the higher valuation cannot technically be compared with previous cycles from decades ago.

In the past, return on equity and profits margins were a lot lower when the markets weren’t as concentrated in technology and communication services. On top of that, we’re still in the early stages of the artificial intelligence (AI) rally, with AI-fueled productivity gains and strong earnings guidance justifying higher valuations.

That doesn’t mean investors don’t need to be cautious or have a comprehensive technical and fundamental grasp of the market, but it does mean they should remain optimistic about where the stock market is heading.

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