Fed Uncertainty Causes Canadian Fixed Rates to Fall

Last Friday, Canadian fixed mortgage rates fell by 20 basis points — a meaningful drop in a market that has seen volatility become the norm. But the reason wasn’t domestic. The catalyst was the US Federal Reserve’s mid-week decision to hold its policy rate steady at 4.25–4.5%, paired with a cautious tone about the path forward.

Rather than providing clarity, the Fed leaned into the theme of uncertainty — a word Fed Chair Jerome Powell used to describe the current economic outlook. Despite projecting two rate cuts in 2025, the Fed simultaneously acknowledged slower growth and higher inflation, which was historically a recipe for stagflation. Its most recent forecast downgraded US GDP growth to 1.7% for next year (from 2.1%) while revising inflation upward to 2.8% (from 2.5%).

Markets interpreted the Fed’s tone as dovish, even though some officials project no rate cuts next year. Four Fed governors — up from one cut in the prior forecast — are calling for no action in 2025. That hawkish shift and Powell’s hedging remarks about inflation and employment revealed a divided central bank facing unprecedented policy uncertainty.

Tariff Troubles and Economic Fallout

Part of this uncertainty stems from President Trump’s sweeping policy changes, particularly his reintroduction of tariffs and regulatory shifts. Powell characterized the inflationary impact of tariffs as “transitory” — a term that drew criticism, given its previous misuse during the pandemic-era inflation surge.

Unlike during COVID, today’s US consumers lack a savings buffer. With personal savings rates down to 4.6% — well below the historical average of 8.4% — many Americans have less capacity to absorb price shocks. Businesses, in turn, may find it harder to pass rising costs onto consumers. With no stimulus, economic growth could soften more quickly than anticipated.

The next round of US tariffs, expected to be announced on April 2 — dubbed by Trump as “the big one” — is already casting a shadow. Investors are bracing for the global economic shockwaves these tariffs may bring. In anticipation, bond yields dropped further, including in Canada, prompting banks and lenders to lower their fixed rates.

Bank of Canada Takes a Cautious Stance

Bank of Canada Governor Tiff Macklem also leaned into a tone of caution. In a speech last week at the Calgary Economic Development, he emphasized that the Bank is focused on minimizing risk, noting that it is “less forward-looking than normal” and may need to “act quickly when things crystallize.”

Despite last month’s inflation reading rising to 2.6% — a figure that likely complicates the BoC’s decision for its April 16 meeting — the broader consensus still expects more cuts later in 2025. That outlook supports the view that variable-rate mortgages could outperform their fixed-rate counterparts over the full term, especially in a declining rate environment.

How Does This Shift Impact Canadian Homeowners and Homebuyers

This recent drop in mortgage rates in Canada is a reminder that global events can quickly shift borrowing costs in Canada. For borrowers, it’s a moment that underscores the importance of staying attuned to international policy moves, especially when they trigger changes in investor sentiment and bond markets. As fixed rates fluctuate and variable options remain sensitive to central bank policy shifts, understanding how these elements interact can offer a strategic edge — particularly for those approaching a renewal or considering a new mortgage in a changing rate environment.

Local fundamentals didn’t drive the 20 bps drop in mortgage rates in Canada, but global ones—particularly the Fed’s wavering confidence, rising inflation risks, and Trump’s unpredictable policy shifts did. For Canadians planning to buy, renew, or refinance, this temporary rate drop presents an opportunity for lower monthly mortgage payments—but also a warning that market conditions remain fluid.

With so much uncertainty in the global and domestic outlook, this moment offers a window for Canadian homebuyers and mortgage holders to revisit their mortgage strategy with their mortgage broker. Whether you’re buying, renewing or refinancing, there’s real value in reviewing your options — especially in a market that could shift quickly.

Whether you’re looking to lock in your fixed interest rate or float your discount with a variable rate, making the right move starts with expert advice. Contact nesto mortgage experts for your personalized mortgage strategy. 

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At nesto, our commission-free mortgage experts, certified in multiple provinces, provide exceptional advice and service that exceeds industry standards. Our mortgage experts are non-commissioned salaried employees who provide impartial guidance on mortgage options tailored to your needs and are evaluated based on client satisfaction and advice quality. nesto aims to transform the mortgage industry by providing honest advice and competitive rates using a 100% fully digital, transparent, seamless process.

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