The U.S. Federal Reserve continued to hold off on a benchmark interest-rate reduction Wednesday as the American economy faces turbulence.

As a result of the Fed’s decision to keep its prime rate at 4.5%, U.S. and Canadian interest rates have diverged further. Previously, the two central banks often adjusted them in lockstep.

Earlier this week, the Bank of Canada lowered its key overnight lending rate by 25 basis points to 2.75%.

The Fed’s decision reflects growing uncertainty over inflation, growth and unemployment, spurred by President Donald Trump’s tariff initiatives and other economic policies that continue to cloud the economic outlook. Commercial real estate investors have been particularly affected as investors pause key investment, development and expansion decisions indefinitely.

“The Fed’s decision to hold rates steady came as no surprise,” Marion Jones, executive managing director of U.S. capital markets for Toronto-based Avison Young, told Connect. “While most investors are continuing to underwrite a soft landing from a macro standpoint, we all have our eyes trained on the potential inflationary impact of heightened tariffs, especially as it relates to the cost and availability of building materials.”

Some Canadian CRE owners and operators are contemplating, or have already begun, moving some operations stateside to avoid the tariffs.

Investors know they that must expect near-term continued volatility in the cost of capital, but the rate-cut conversation is giving way to a larger dialogue around trade wars, rising costs, and potential supply-chain disruption, added Jones.

“This confluence of factors can affect the rebounding office market – where every [tenant-improvement] dollar is scrutinized heavily,” said Jones, who is based in New York and also a principal of Avison Young. “We still sense optimism, as the labour market is quite stable, companies are making serious leasing commitments and inflation printed at 2.8% in February, dramatically reduced from its peak of 9.1% in June 2022.

Meanwhile, the Fed also downgraded its economic-growth outlook Wednesday, anticipating a slowdown in the coming years.

According to the Fed’s latest quarterly economic projections, growth is expected to decline to 1.7% in 2025 and to 1.8% in 2026, well down from 2.8% in 2024. The Fed expects inflation to edge higher, reaching 2.7% by year-end 2025, still above the U.S. central bank’s 2% target.

“The original inflation target of 2% might not be structurally attainable in face of a new tariff environment,” said Jones.

Although the Fed maintained its projection for two rate cuts, internal divisions among policymakers suggest the possibility of a more cautious approach. Eight of the 19 Fed governors indicated that they foresee only one interest-rate reduction or none at all. The pessimistic-governor count doubled from four in December.

“It will be harder for them to cut rates this year with inflation moving sideways,” Michael Gapen, an economist at Morgan Stanley, told the Associated Press.

During a news conference following the interest-rate decision, Fed Chair Jerome Powell acknowledged that inflationary pressures have been compounded by Trump’s tariffs, which are beginning to drive American prices higher. Powell warned that tariffs “would likely stall the progress” made in reducing inflation since its 2022 peak.

In a social-media post, Trump strongly disagreed with the Fed’s stance. He contended that the Fed would be “much better off” if it allowed tariffs to “ease” their way into the economy.

While Powell reiterated that the Fed remains committed to returning inflation to 2% by 2026, he cautioned that the economic outlook remains uncertain.

“We’re not going to be in any hurry to move,” he told reporters. “We’re well-positioned to wait for further clarity.”

The Fed also announced plans to slow the pace at which it reduces its Treasury-bond holdings, now allowing only US$5 billion to mature each month instead of the previous US$25 billion. This move is expected to exert downward pressure on long-term Treasury yields.

Unemployment is also projected to rise, with the Fed forecasting an increase to 4.4% by the end of 2025 from from the current 4.1%.

The combination of higher inflation, slower growth, and rising joblessness places the Fed in a delicate balancing act. Powell acknowledged concerns about inflationary challenges but remained optimistic regarding the broader economic trajectory.

“The economy seems to be healthy,” he told reporters. “We do understand that [market] sentiment has fallen off pretty sharply, but economic activity has not yet.”

Earlier this week, Connect reported that Trump’s tariffs policy is not only wreaking havoc in Canada, but also having a negative impact at home.

The tariff landscape has evolved significantly since Trump’s initial moves earlier this year, with implications affecting markets, industries, and global relations.

His strategy appears to oscillate between imposing tariffs and rolling them back to exert leverage. Delays with Canada and Mexico suggest successful short-term concessions, but the threat of reimposition looms if progress stalls.

In Canada, the federal government is in the process of revamping its procurement policies and practices involving U.S. companies, including the scheduled long-term purchase of an F-18 fighter jet fleet. Ottawa has also adopted a Buy Canadian policy.

This week, new Prime Minister Mark Carney travelled to Europe in a bid to expand free trade and bolster expand overseas partnerships to help offset reductions in sales to the U.S.

Meanwhile, provincial governments are expanding the Buy Canadian strategy to their jurisdictions while ordering the removal of certain products, notably beer and liquor, from store shelves.

Citing data from various industry sources, The Globe and Mail reported that Canadian shoppers’ patriotism is already putting a large dent in American business.

Canadian shoppers are embracing the rapidly expanding strategy as they display their disdain for Trump’s numerous musings on annexing Canada. In addition, Canadian shoppers strongly oppose a 25% levy on steel and aluminum products flowing between the two countries.

And, many Canadian businesses, particularly grocery retailers, are stocking and highlighting more goods produced in Canada. National, regional and local retailers are not renewing wholesale orders for U.S. items as they also embrace the Buy Canadian movement.

Ottawa has also launched a highly praised effort to remove domestic trade barriers.

In addition, China has retaliated with 10% to 15% tariffs on U.S. goods, signalling a tit-for-tat escalation. (China is also imposing higher hurdles on imports from Canada as overall relations between the two countries remain frosty.)

Economists estimate that tariffs on Canada, Mexico, and China could raise U.S. household costs by US$830 to US$1,072 annually in 2025, according to the Tax Foundation.

Broader estimates suggest that American middle-income families might lose $1,700 to $3,900 yearly if tariffs persist. 

With files from Joe Palmisano, Connect Money

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