The Federal Reserve is expected to raise its policy rate this afternoon for the first time since July 2023, lifting the federal funds target range to 3.75 to 4.00%. CME FedWatch data puts the odds of a 25 basis point increase at 92.7%. The Bank of Canada, meeting two weeks ago, went the other way, holding its policy rate at 2.25% for an eighth straight announcement. The same global inflation pressure is producing two different central bank conclusions, and the reason why matters more to a Canadian portfolio than either decision on its own.
Same Inflation Pressure, Different Verdicts
Canadian Consumer Price Index growth held at 3.0% year over year in August, unchanged from July, Statistics Canada reported September 14. Core measures, which exclude gasoline, came in at 2.4%. Gasoline itself rose 22.8% year over year, easing slightly from a 25.7% reading in July but still the single largest driver of the headline number. Andrew Grantham, an economist at CIBC, wrote that the Bank of Canada is likely to stay on hold despite a possible energy-driven re-acceleration in headline inflation, citing the downside risks to growth from U.S. trade policy.
South of the border, Federal Reserve Governor Lisa Cook has described a similar split: the personal consumption expenditures price index rose 3.7% over the twelve months through June, with core prices at 3.3%, alongside a labour market she called low-hire, low-fire at 4.2% unemployment. Where the Bank of Canada is weighing energy-driven inflation against a fragile growth outlook and choosing growth, the Federal Reserve under Chair Kevin Warsh appears set to weigh the same tradeoff and choose inflation.
Why the Fed Reversed Course
Rate-hold odds heading into this meeting stood near 70% before Chair Warsh spoke at Jackson Hole. His remarks, that better-than-expected summer inflation readings did not demonstrate underlying trends had meaningfully improved, reset the market to pricing a hike as the base case within days. Deutsche Bank strategists have since called a hike almost certain, and a survey of 32 former Fed officials found 29 in favour of raising rates now rather than waiting for confirmation that inflation is cooling.
The chart below sets the components of Canadian August inflation against each other, isolating how much of the headline number is a genuine broad-based trend the Bank of Canada needs to react to, and how much is the Strait of Hormuz conflict passing through at the gas pump.
Gasoline, up 22.8% year over year on the Strait of Hormuz conflict, dwarfs every other component of Canadian headline inflation, while core prices excluding gasoline sit closer to the Bank of Canada target. Source: Statistics Canada.
The Canadian Transmission
A widening rate gap between Ottawa and Washington has a direct mechanical effect: it tends to pressure the Canadian dollar lower, since capital follows the higher yield. A softer loonie raises the cost of imported goods, which shows up in Canadian inflation with a lag, working against the hold decision the Bank of Canada just made, from the opposite direction intended. The Bank is not choosing between inflation and growth in isolation. It is choosing growth while a Fed hike quietly undermines the inflation side of its own mandate.