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Fed Signals Gradual Easing & Elevated Rates Into 2025 And 2026


Yacht Sailing on Rough Waters

ECONOMIC SPOTLIGHT // Q4 2024


On December 18, 2024, the Federal Reserve announced a 25-basis-point rate cut, lowering the federal funds rate to a range of 4.25% to 4.50%. While widely expected, the Fed's guidance emphasized a gradual approach to future easing, influenced by upward revisions to growth and inflation forecasts. This cautious stance highlights the resilience of U.S. domestic demand and the persistent need to manage inflationary pressures.


Key Takeaways

  • Future Rate Path: The Federal Reserve projects only one additional 25-basis-point cut in January 2025, followed by a pause, keeping rates in the 4.0%–4.25% range through the year.


  • Inflation Outlook: Core Personal Consumption Expenditures (PCE) inflation is forecasted at 2.5% for 2025, reflecting continued price pressures.


  • Growth and Labor: GDP growth is expected to reach 2.1% in 2025, while the unemployment rate edges lower to 4.3%.


  • Long-Term Neutral Rate: The neutral interest rate estimate has increased to 3%, anticipated by 2027.


Implications for the U.S. Economy

The Federal Reserve's decision reflects a robust economy that continues to grow despite elevated interest rates. Government spending supports demand, and while labor markets show signs of cooling, they remain stable rather than contracting significantly. The Fed’s cautious easing strategy underscores its commitment to controlling inflation while sustaining economic growth.


Cross-Border Impact on Canada

Given the close economic ties between the U.S. and Canada, the Federal Reserve's policy decisions are likely to influence Canadian monetary and economic trends in 2025:


  • Interest Rate Alignment: The Bank of Canada (BoC) may adopt a parallel cautious easing approach, particularly as it seeks to balance domestic inflation concerns with the risks of capital outflows caused by a widening rate differential with the U.S.


  • Trade and Growth: Canada’s economic outlook remains tied to U.S. demand, particularly in key sectors such as energy, automotive, and manufacturing. The Fed’s forecasted growth of 2.1% signals a steady environment for Canadian exports, though slower U.S. easing could temper broader economic momentum.


  • Inflation Transmission: Persistent inflationary pressures in the U.S. may spill over into Canada, complicating the BoC’s path to its 2% inflation target.


Outlook for Canadian Policymakers

Canadian policymakers face an increasingly complex landscape in 2025, shaped by both monetary policy shifts and political transitions in the U.S. The inauguration of the next U.S. president in January 2025 introduces potential policy changes that could significantly influence cross-border economic dynamics. Trade agreements, energy policies, and immigration frameworks are areas where the new administration's stance could alter growth trajectories for both economies.


For Canada, any pivot in U.S. trade or regulatory policies might create opportunities or challenges for exporters, particularly in critical industries like energy and manufacturing. Additionally, changes in fiscal priorities under the new U.S. leadership could shift demand patterns and global investment flows, with implications for Canadian markets.


Amid these uncertainties, the Bank of Canada is expected to maintain a cautious, data-driven approach, prioritizing inflation control while adapting to the evolving political and economic landscape. Enhanced coordination with U.S. policymakers may become essential to navigate shared challenges and opportunities in the year ahead.


Stay tuned for updates as we monitor these developments closely.


Source – RBC Economics*

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