Fed Uncertainty Causes Canadian Fixed Rates to Fall

Canadian homebuyers and mortgage holders saw some unexpected relief last week. Fixed mortgage rates dropped by 20 basis points — a sizable shift — but the reason for this drop wasn’t Canadian at all. It came from across the border, triggered by the U.S. Federal Reserve’s latest decision to hold its key interest rate steady.

Instead of a clear direction, the Fed sent a mixed message. On one hand, it hinted at potential rate cuts in 2025. On the other, it warned of higher-than-expected inflation and slower GDP growth, painting a murky picture of what’s to come. This uncertainty had a ripple effect on global bond markets — and that includes Canada.

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Why U.S. Fed Policy Affects Canadian Mortgage Rates

When investors sense risk or indecision from the U.S. central bank, they move their money into safer assets like bonds. That drives bond yields down — and since Canadian fixed mortgage rates are closely tied to bond yields, they follow suit.

Last week, this exact chain reaction played out. As U.S. bond yields dipped, Canadian ones followed, prompting banks and lenders to cut fixed mortgage rates here at home. This is a clear reminder that global events, not just domestic policy, can impact Canadian borrowing costs.

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Tariff Fears Add to the Economic Jitters

The uncertainty didn’t stop at interest rates. Former President Donald Trump’s hints at reintroducing broad tariffs in 2025 have added to market nervousness. These tariffs, if implemented, could raise prices and slow economic growth in both the U.S. and its trading partners — including Canada.

Fed Chair Jerome Powell called the inflationary effects of tariffs “transitory,” but many economists remain skeptical, remembering how that same word was used — and misused — during the pandemic. Unlike then, consumers today have less of a financial cushion, with U.S. savings rates now under 5%. If prices rise again due to tariffs, the strain on wallets could be sharp and immediate.

Investors aren’t taking any chances. With potential tariffs, slower growth, and no clear monetary policy direction, the markets are reacting fast. And Canadian borrowers are benefitting — at least for now — with cheaper fixed-rate mortgages.

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Bank of Canada Stays Cautious

Closer to home, the Bank of Canada is also treading carefully. Governor Tiff Macklem recently stated that the central bank is “less forward-looking than normal,” choosing to wait for more clarity before making bold moves. While inflation rose to 2.6% last month, it hasn’t derailed expectations of a rate cut later in 2025.

This wait-and-see stance supports the case for variable-rate mortgages over the long term — especially if the rate-cutting cycle begins as predicted. But as always, timing and individual risk tolerance matter.

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What Should Canadian Homeowners Do?

This 20 bps drop in fixed rates is a golden opportunity for Canadians approaching renewal or buying soon. Whether or not it lasts depends on upcoming economic data and global events. If the U.S. economy slows further, or if trade tensions ramp up, rates could fall even more — or swing back up quickly.

Now is the time to review your mortgage strategy. A fixed-rate mortgage may offer stability, but a variable-rate mortgage could save you more in a falling-rate environment. Speak to your broker or lender to weigh the pros and cons based on your budget and future plans.

While today’s dip in fixed rates is tied to Fed uncertainty, it’s not the first time U.S. economic data has thrown Canadian mortgage markets off course.

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Final Thoughts

The Canadian mortgage landscape is being shaped by global forces as much as local ones. With the U.S. Fed signaling uncertainty and the BoC staying cautious, borrowers are left in a dynamic but somewhat confusing environment.

Still, moments like these — when fixed rates drop without warning — present an opportunity. Whether you’re renewing or just starting your mortgage journey, take the time to understand how these shifts can affect your financial picture.