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European and Canadian central banks lower rates while the U.S. stands pat

2025-01-31

BeiChen Lin, CFA, CPA

BeiChen Lin, CFA, CPA

Director, Head of Canadian Strategy




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hello everyone and welcome to market weeken review for the week ending January 31st 2025 my name is Ban Lyn on today's market weekend review we're going to recap some of the latest Central Bank decisions and we're going to talk about what investors should know when it comes to navigating Market volatility and uncertainty and stay tuned towards the end of this episode for a bit of a surprise so first let's start by recapping the Central Bank decisions this week we had decisions from three key central banks the Federal Reserve the Bank of Canada and the European Central Bank broadly speaking the decisions from each of these central banks were in line with both our expectations here at Russell Investments as well as the broader expectations of the market we saw the Federal Reserve maintain interest rates unchanged at this meeting whereas the European Central Bank and the Bank of Canada both lowered interest rates by 25 basis points part of the reason why we see this Divergence in Pace where the Federal Reserve has generally speaking cut rates at a more gradual Pace than the ECB and the Bank of Canada is because of the Divergence in economic fundamentals between the US and non- US regions so even though inflation broadly speaking has been coming down in both the us as well as non- us what we've also been seeing is that the the US economy has been relatively resilient so for example if you look at the fourth quarter GDP growth numbers the US economy grew at a pace of 2. 3% year-over-year which is relatively robust earnings growth in the US is about 11% year-over-year in the fourth quarter for S&P 500 companies and the unemployment rate remains relatively low so it's a pretty robust economic backdrop meanwhile if you look at non us it's a little bit of a different story so in Canada for instance even though overall GDP has been growing the per capita measures of GDP growth have actually been contracting in recent months and the unemployment rate has risen by 1.7 percentage points from its 2023 low so the unemployment rate in Canada has gone up quicker than the unemployment rate in the US meanwhile in Europe fourth quarter European GDP grew at a pace of approximately 1% on an annualized basis so roughly half the pace of GDP growth we saw in the US and so that's why the Federal Reserve has been cutting interest rates a little bit slower than the European Central Bank and Bank of Canada overall and that's one of the reasons why this time the Federal Reserve actually maintained interest rates steady Sher Pao said in his press conference that he wants to see more progress on their inflation fight before they make the next interest rate cuts from a forward looking perspective we continue to think that inflation rates will likely continue to moderate in all three regions and we think that the Federal Reserve will accordingly be able to cut interest rates twice in 2025 we expect that the US economy might continue to outperform the non- US economy which is why we anticipate that the Federal Reserve might cut rates less sharply than the European Central Bank and the Bank of Canada in 2025 so continuing on the trend that we had seen in 2024 now I want to talk about navigating Market volatility and uncertainty because as we continue throughout the rest of 2025 investors might be faced with different forms of volatility and uncertainty whether that's with regards to tariffs we saw more discussion this week about the potential imposition of tariffs on key us trading partners or whether it's in the economic data although we generally believe that inflation rates will moderate they might not necessarily do so in a linear manner in fact this year as people might know it's actually the year of a snake and from our perspective I think it's a very powerful metaphor because when we think about snakes snakes are usually curvy right and so we can expect that the economic and market backdrop could see many twists and turns now in this type of environment we think that staying calm staying disciplined taking objective look at the data is critical for investors thanks for watching hi I'm Sophie antto head of portfolio and business Consulting at Russell Investments if you liked what you just saw and heard consider subscribing to our YouTube channel or check us out on LinkedIn thanks for tuning in

Executive summary:

  • The European Central Bank and the Bank of Canada both slashed rates by 25 bps
  • The Fed held rates steady amid ongoing economic resilience 
  • The importance of staying calm and disciplined during times of uncertainty

On the latest edition of Market Week in Review, Investment Strategist BeiChen Lin recapped the latest rate decisions from the U.S. Federal Reserve (Fed), the Bank of Canada (BoC), and the European Central Bank (ECB). He also shared key takeaways for navigating market volatility and uncertainty, speaking in Mandarin during the final portion of the segment in honor of the Lunar New Year.

Assessing the latest rate decisions from key central banks

Lin began by noting that the Fed, the BoC, and the ECB all held policy meetings this week, with the outcomes from each meeting broadly in line with market expectations. As expected, the Fed opted to leave rates unchanged at 4.25%-4.50% during its Jan. 28-29 meeting, he said, noting that the pause came after the U.S. central bank delivered a cumulative 100 basis points (bps) of rate cuts during the last few months of 2024. Meanwhile, both the ECB and the BoC lowered rates by 25 bps at their respective meetings, bringing their cumulative rate cuts for this cycle to 125 bps and 200 bps respectively, Lin remarked.

Broadly speaking, the reason the Fed stayed on hold while its European and Canadian counterparts delivered additional cuts is because of the continued resilience of the U.S. economy, Lin said. For instance, he noted that U.S. GDP (gross domestic product) grew at a 2.3% annualized pace during the fourth quarter, while fourth-quarter earnings growth among S&P 500 companies is tracking near 11% on a year-over-year basis. When combined with a relatively low U.S. unemployment rate of 4.1%, this has made for a pretty robust economic backdrop, he noted. 

In Canada and Europe, however, the story is a bit different, Lin said. “In Canada, for instance, even though overall GDP has been growing, the per-capita measures of GDP growth have actually been contracting in recent months. In addition, Canada’s unemployment rate has risen by 1.7 percentage points from its 2023 low,” he remarked. Meanwhile, in Europe, fourth-quarter GDP growth was only around 1% on an annualized basis—roughly half the pace of GDP growth seen in the U.S., Lin noted.

“This divergence in economic fundamentals between the U.S. and other countries is one of the reasons why I think the Fed has generally been cutting rates at a slower pace. In addition, Fed Chair Jerome Powell also stated at this week’s press conference that he wants to see more progress made on the inflation front before lowering rates again,” he remarked.

Going forward, Lin said he expects that U.S. inflation will continue to moderate as the year progresses, likely putting the Fed in a position to be able to cut rates twice in 2025. However, due to the potential for continued U.S. economic outperformance, the Fed will probably lower rates at a more gradual pace than its peers, he concluded.

The Year of the Snake: A metaphor for the twists and turns that may lie ahead?

As 2025 hits its stride, investors might be faced with different forms of volatility and uncertainty, Lin said. Chief among these could be the potential imposition of tariffs on key U.S. trading partners as well as surprises in economic data, he noted. “For example, while we think that inflation will generally decline, it might not do so in a linear manner,” Lin said.

Perhaps fittingly, he noted that 2025 is the Year of the Snake, which he said could be a powerful metaphor for the months ahead. “Snakes are curvy in shape, and we think the economic and market backdrop could look similar in the months ahead, with many twists and turns possible,” Lin remarked.

Finishing the segment in Mandarin in honor of the Lunar New Year, he stressed that when investors are faced with an uncertain economic environment, it's important to remain calm and disciplined. “We think investors need to be able to objectively look at the latest macroeconomic data and company earnings in order to make better investment decisions. Staying calm is critical to achieving this,” Lin concluded.

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