As widely anticipated, both the U.S. Federal Reserve and the Bank of Canada reduced their policy rates by 25 basis points on Wednesday.
For the Fed, this was only the second cut in five years and the first since September 2024. The federal funds target range now sits at 4.0 to 4.25 per cent 鈥 still well within restrictive territory by any standard.
By contrast, the Bank of Canada has pursued a far more aggressive easing cycle.
Since June 2024, it has lowered its target for the overnight rate eight times, bringing it down to 2.5 per cent. This is near the bottom of the Bank鈥檚 estimated neutral range of 2.25 to 3.25 per cent, meaning policy is no longer restrictive and, at best, only neutral.
Many economists agree that the Fed鈥檚 decision was appropriate given recent signs of labour market weakness in the U.S. Job creation has slowed and weekly claims for unemployment benefits have trended upward. With inflation having eased considerably from its 2022 highs, the Fed has some room to act pre-emptively to avoid a deeper labour market downturn.
Yet even here, the effectiveness of the rate cut is questionable.
Standard macroeconomic models suggest a lag of 12 to 18 months before monetary easing meaningfully affects output and employment. If today鈥檚 concern is a rising unemployment rate, then policy changes implemented now may arrive too late to prevent further deterioration. Hence, looser monetary policy alone may not be the remedy.
With the fall market underway, will the rate cut be the push buyers need to get off the sidelines?
In Canada, the situation is even more complicated. Inflation has returned close to target, but unemployment surged to 7.1 per cent in August. This jump has persuaded many observers that additional easing was warranted. I disagree, and for two main reasons.
First, with the overnight rate already at a non-restrictive 2.75 per cent before Wednesday鈥檚 cut, a further reduction is unlikely to make much difference to either inflation or unemployment.
The bank鈥檚 decision looks less like a deliberate attempt to shape economic outcomes and more like the path of least resistance 鈥 aligning with market expectations to avoid criticism.
Second, today鈥檚 elevated unemployment is primarily the delayed consequence of past monetary tightening.
Between March 2022 and July 2023, the bank raised its policy rate to 5 per cent and held it there for nearly a year. That restrictive stance has since filtered through the economy, leading to weaker demand, slower investment, and ultimately job losses. Unemployment has climbed by 1.6 percentage points since mid-2023 鈥 about 420,000 more Canadians out of work. Compared with July 2022, the increase is 2.3 points, representing nearly 600,000 additional unemployed.
In short, the bank bears significant responsibility for the current weakness in the labour market. More easing will not undo the damage; if anything, it risks fuelling financial instability and reigniting housing-market imbalances reminiscent of the post-pandemic surge.
Central banks can certainly curb inflation by raising rates to cool excess demand. But Canada鈥檚 recent inflation was not caused by demand overheating.
It was largely the product of temporary supply shocks: supply-chain bottlenecks, surging commodity prices after Russia鈥檚 invasion of Ukraine, and corporations exploiting an environment of generalized price increases to expand margins. These forces drove inflation to a peak of 8.1 per cent in June 2022.
As these pressures faded, inflation declined. The Bank of Canada, however, was quick to claim victory.
鈥淢onetary policy has worked to reduce price pressures,鈥 it boasted in October 2024. The truth is less flattering: inflation subsided because supply shocks unwound, not because of the bank鈥檚 restrictive stance. In the process, hundreds of thousands of Canadians lost their jobs unnecessarily.
Now that unemployment is uncomfortably high, the bank is unlikely to admit its missteps.
Instead, it may deflect responsibility by pointing to external shocks such as Donald Trump鈥檚 new tariff regime, which has already unsettled North American trade flows. But scapegoating trade policy cannot erase the fact that most of today鈥檚 labour market pain is a direct by-product of the bank鈥檚 earlier decisions.
The same old policies aren’t going to lead to change - policy-makers need to admit there’s
Fighting high unemployment is not a job the Bank of Canada can perform effectively at this stage. That responsibility falls to the federal and provincial governments. Active labour market policies, infrastructure investment, social housing programs, and income supports can address unemployment far more directly and immediately than marginal changes to overnight rates.
The bank鈥檚 most constructive role now is to keep its policy rate steady and give fiscal policy room to lead 鈥 an approach economists sometimes describe as 鈥渇iscal dominance.鈥 In practice, this means prioritizing government financing needs and overall economic stability over a narrow, mechanical focus on inflation targeting.
Skeptics argue that such a shift risks rekindling inflation. The concern is valid, but it should not be exaggerated.
The bank retains the tools to contain runaway price pressures, and any inflation generated by stronger fiscal action would likely remain within manageable limits.
Even if inflation drifts modestly above target, that outcome would be far less damaging than the prolonged economic and social costs of mass unemployment.
By aligning its latest rate cut with market expectations, the Bank of Canada has insulated itself from immediate criticism.
Yet at a moment when bold co-ordination between monetary and fiscal policy is urgently required, the bank has opted for caution and consensus.
Canada deserves more than a central bank that follows rather than leads.
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