Central Bank Week: fed Weighs Shutdown Risks as BoC Signals Imminent Rate Cut
The coming week will be dominated by major central bank decisions, with the US Federal Reserve, Bank of Canada (BoC), Bank of Japan (BoJ), and European Central Bank (ECB) all scheduled to announce their latest policy stances.Amidst a US government shutdown and shifting global economic currents, policymakers face a complex landscape as they navigate inflation, growth, and geopolitical risks.
The Bank of Canada is widely expected to lead the way, kicking off the central bank meetings with an anticipated rate cut on Wednesday. Recent data showing a higher-than-expected acceleration in Canadian CPI in September, which has prompted investors to scale back their expectations for further cuts later in the year and into 2026. However, the Canadian dollar’s relatively stable performance since April suggests the market has largely priced in an October reduction, and further easing remains a possibility.
Adding to the economic uncertainty, relations between Canada and the US have deteriorated following President Trump’s abrupt termination of trade talks, making a resolution elusive. This geopolitical friction further supports the case for a cautious approach from the BoC.
Across the globe, the US Federal Reserve will conclude its two-day monetary policy gathering on Wednesday against the backdrop of an ongoing government shutdown, now entering its fourth week.The impasse between Democrats and Republicans over funding legislation, particularly regarding healthcare subsidies, shows no sign of resolution. president Trump’s refusal to negotiate while the government remains closed increases the potential for a important economic impact, a factor the Fed will undoubtedly consider.
If a funding deal remains out of reach by Wednesday, downside risks to the US economy are likely to become more prominent in policymakers’ discussions. While the Fed previously signaled expectations for two more rate cuts in 2025 and one in 2026, recent commentary from Chair Powell suggests these views haven’t substantially shifted.The Fed remains focused on the labor market and views potential rate cuts as insurance against unexpected unemployment spikes, rather than a necessary step.
However, the Fed is also wary of persistent price pressures and has committed to addressing inflation that remains above its target. Uncertainty surrounding the full economic impact of Trump’s tariffs further complicates the outlook, making a significant shift in policy language unlikely. Despite the escalating trade tensions between the US and China and the ongoing shutdown, a markedly dovish tone from the Fed is not anticipated, as even traditionally dovish members like Waller are hesitant to commit to a series of rate cuts. This caution raises the risk of disappointment for traders expecting a more aggressive easing path.
The shutdown is also delaying the release of crucial US economic data. Key reports,including Monday’s durable goods orders,Thursday’s advance GDP estimate for the third quarter,and Friday’s personal income and outlays report,are all on hold. Investors will be relying on business surveys, such as Tuesday’s consumer confidence index and Friday’s Chicago PMI, for insights into the economy’s health. Should these surveys raise concerns, it could challenge the fed’s cautious stance.
Turning to Japan, the Bank of Japan will announce its policy decision on thursday, just after the Fed. While initial expectations pointed towards a potential rate hike, the odds have diminished following the appointment of Sanae Takaichi as the new LDP leader and prime minister. Takaichi has pledged to prioritize government spending and accommodative monetary policy, aligning with “Abenomics.” This shift puts the BoJ in a arduous position, as inflation remains above its 2% target despite recent declines. While the Bank has expressed optimism about Japan’s economic outlook, Takaichi’s appointment has likely reduced the immediate pressure for action, with investors now assigning only a 20% probability to a rate hike in October.
the European Central Bank is expected to maintain its current course when it meets on Thursday. Having paused rate hikes since July, the consensus within the Governing Council is to hold rates steady at 2.0% for the foreseeable future. With inflation near the ECB’s 2% target and the Eurozone economy demonstrating resilience despite US tariffs, policymakers appear content to preserve their options. This stance is positive for the euro, particularly given the Fed’s recent resumption of easing. Preliminary CPI estimates for October, due Friday, are not expected to significantly move the market, but the flash Q3 GDP readings on Thursday will be closely watched. A weaker-than-expected GDP figure could revive expectations of future rate cuts, possibly weighing on the euro.
