balanced fund quarterly report
December 31, 2025
Economic Commentary
Both the Bank of Canada and the U.S. Federal Reserve lowered interest rates during the quarter. The Fed cut rates twice for a total move of 50 bp while the Bank of Canada held to one move of 25 bp. The Bank of Canada lowered interest rates by a total of 100 bp during the year. They started their moves early in the year, with cuts of 25 bp back in January and March and then followed that up with two more cuts in September and October. The Fed remained on the sidelines until September when they lowered interest rates for the first time this year. They followed that up with the two cuts that occurred during the fourth quarter. The overnight rate ended the year at 2.25% in Canada and 3.75% in the U.S. The term of Fed Chair Jerome Powell ends in May 2026, and it is widely anticipated that President Trump will not extend Powell’s term but rather nominate someone who will pursue his objective of being more aggressive in lowering interest rates further. Market expectations are calling for two additional interest rate cuts by the Fed in 2026, while it is expected that the Bank of Canada will remain on the sidelines for the foreseeable future.
After increasing from lower levels earlier in the year, inflation surprisingly declined in the fourth quarter. Canadian headline inflation dropped from 2.4% at the end of the third quarter to 2.2% in November. In the U.S., inflation fell from 3.0% to a better-than-expected level of 2.7% in November. The core rate of inflation in Canada is 2.8% while in the U.S. it is lower, sitting at 2.6%. These lower inflation levels have surprised financial markets as the expectation was that there would be upward inflationary pressure resulting from the higher tariffs that were implemented by the U.S. A key development during the fourth quarter was the shutdown of the U.S. government from October 1 to November 12, covering a period of 43 days which was the longest in U.S. history. This resulted in the delay of key economic data being released, making it more difficult for the U.S. Federal Reserve to set interest rate policy as well as for financial markets to gauge the strength of the U.S. economy.
