December 12, 2025

Key takeaways

• The Federal Reserve cut rates to support the labour market, while the Bank of Canada held rates steady due to economic resilience.
• Future monetary policy is uncertain, and we see the risk of prolonged, above-target inflation complicating rate decisions.
• We could be approaching the end of the rate-cutting cycle that has supported equity and credit markets. We forecast positive but moderate returns going forward. 

The United States (US) Federal Reserve (Fed) cut interest rates this week— a measured move aimed at supporting the labour market while moving policy toward a neutral stance. Fed Chair Powell emphasized that future decisions will be data-dependent, rather than automatic. 

The Bank of Canada (BoC) took a different tack, holding rates on the view that the Canadian economy remains resilient and closer to its 2% inflation target. Markets responded quickly: futures now price in two Fed cuts next year and a Canadian rate hike. We view this reaction as too aggressive; our base case calls for a single Fed cut in 2026 and a BoC on hold.

Why this matters

Powell made clear that any further easing hinges on upcoming inflation and labour market data. The labour picture is particularly noisy. That uncertainty helps explain the Fed’s bias toward modest easing in an effort to guard jobs rather than keeping policy tight.

However, we see a risk of higher inflation next year coming from government stimulus and tariffs. While we believe the effects on inflation are ultimately temporary, this could keep headline inflation well-above target for longer than markets assume, complicating the Fed’s path.

How this plays for markets

Moderating inflation and cooling labour markets have created an economic environment supportive of equities and credit this year, as these conditions have justified rate cuts.  The Fed’s latest rate cut preserves that constructive picture, however, we believe that we will see fewer cuts going forward. 

If this comes to pass, the upside for equities would be limited. The biggest threat is renewed inflation that prevents further easing or forces a policy reversal. The latter scenario could prompt a rapid repricing of short-term rates and hurt both bonds and stocks. Conversely, a material slowdown in growth would justify additional easing and potentially boost markets.

What we're watching

The bottom line

We think the balance of risks supports fewer cuts. We remain positioned to capture further upside in equities and credit while preserving flexibility and protection against a rise in inflation — a risk we believe markets are underestimating.

Disclaimer

This material, including any attachments, is provided for informational purposes only and is not intended as investment, legal, accounting, or tax advice. It has been prepared without regard to individual financial circumstances or objectives, and readers should consult independent professionals, as applicable. All views, opinions, estimates and projections contained in this material constitute Connor, Clark & Lunn Private Capital Ltd. (“CC&L Private Capital”)’s judgment as of the date of publication and are subject to change without notice. Certain information contained herein is based on information obtained from third-party sources that CC&L Private Capital considers to be reliable. Past performance is not indicative of future results, future returns are not guaranteed, and loss of capital may occur. This material is intended for the use of the recipient only and no matter contained herein may be separately used, disseminated, distributed, reproduced or copied by any means, in whole or in part without express prior written of CC&L Private Capital. This is not an offer to sell or a solicitation to buy any securities and should not be construed as a sales communication.