By Michael O’Neill
Policymakers at the Bank of Canada and the Fed appear to be living in an alternate reality from the one consumers inhabit. In the policymakers’ world, tariff disruption, job losses, and persistently higher inflation risks are fairly balanced. Consumers look at the same numbers and are worried rather than reassured.
Place Your Bets
The long-awaited, highly anticipated, and final FOMC meeting has come and gone. To no one’s surprise, the Fed cut its benchmark rate by 25 bps to 3.75%. But the messaging was as clear as a game-of-chance wheel. Imagine a Crown and Anchor wheel, but instead of crowns and anchors, the wheel only has Up, Down, Unchanged. Policymakers started it spinning today, and it won’t stop until January 29, 2026.
The statement framed the cut as a response to a shifting balance of risks, particularly a rise in downside risks to employment, even as inflation “remains somewhat elevated” and has moved higher in recent months. The Fed felt compelled to act, but it is not confident enough in the inflation outlook to declare victory or signal follow-through. The fractured vote reinforces that interpretation, with Trump-plant Stephen Miran pushing for a 50-bp cut and the Chicago and Kansas City Fed presidents wanting rates to be left unchanged.
Main Street Fear, DC Denial
The latest consumer sentiment report shows Americans are deeply worried about the high cost of living and expect inflation to rise, not fall. Households say their financial situation has deteriorated, and many are already cutting back on spending. Those anxieties are only being amplified by fears that Trump’s tariffs will make everyday life even more expensive.
Policymakers may have been sipping something stronger than water when they made their projections. Officials see inflation drifting lower, GDP growth picking up, and unemployment roughly steady. That combination hardly argues for an urgent or aggressive easing cycle. Instead, it suggests a central bank that believes the economy is more robust than consumers’ reality and sees no need to cut rates.
Same View Different Country
‘Tis the season to be jolly and no one is more jollier than Bank of Canada Governor Tiff Macklem. The Governor reviewed the labour force data, the latest inflation numbers, and the GDP revisions, decided all was right with the economy, and left interest rates unchanged at 2.5%.
It was really a Hobson’s choice.
Go back to October. At that meeting, the Bank cut rates to 2.5% because the economy was weak. Domestic demand was soft, business investment was subdued, exports were falling, and the labour market was losing momentum. Macklem stated, “If inflation and economic activity evolve broadly in line with the projection, Governing Council sees the current policy rate as about the right level.”
Deputy Governor Contradicts
That pronouncement explains today’s decision, even though just three weeks ago Deputy Governor Nicolas Vicent delivered a stark assessment of Canada’s economic fundamentals.
He described a country caught in a vicious loop of weak productivity. Growth is slowing because businesses are not investing. Businesses are not investing because demand is weak. Demand is weak because wage growth is restrained. Wages are restrained because productivity is stalled. And productivity is stalled because the country has not been building the competitive foundation that drives real long-term growth.
The Deputy and the Governor saw the same information and came to completely different conclusions.
The BoC justified lowering rates at the previous meeting, noting “Canada’s labour market remains soft. Employment gains in September followed two months of sizeable losses. Job losses continue to build in trade-sensitive sectors and hiring has been weak across the economy. The unemployment rate remained at 7.1% in September and wage growth has slowed.”
Today Mr. Macklem crowed about the labour market showing signs of improvement and that it was posting solid gains for the past three months.
That is only true if your ambition is limited to part-time work. Stats Canada reported that over the past three months, part-time employment increased at a faster rate (+2.7%) than full-time employment (+0.5%). Equating part-time jobs to a healthy employment market is like mistaking gas fumes for a full tank. And fumes won’t get you far, especially when Trump’s trade war against Canada shows no signs of abating. Trump is now looking to fertilize the tariffs.
“Put That in Your Potash Pipe and Smoke It”
President Trump essentially admitted his tariffs screwed up America’s farming industry when he announced a $12 billion farm-aid package. But he wasn’t done. He then announced he would provide additional help to American farmers by “putting severe tariffs” on Canadian potash.
Perhaps his chef mistakenly garnished his cheeseburger with a psilocybe mushroom rather than a shiitake because slapping a tariff on a product that is essential to farmers to boost crop yields, enhance plant disease resistance, and improve water retention in soils sounds like a hallucination. Canada supplies 90% of the potash used by American farmers.
FX Markets Blasé
FX traders appeared to be unimpressed with both central bank decisions. USDCAD barely budged after the BoC but drifted lower post-Fed because they believe the BoC will remain sidelined while the Fed may ease further. The other G-10 majors followed suit. Today’s monetary policy decisions were a clash of egos and realities and it’s the consumer that will pay the price.
