1Q26_ Quarterly Outlook Report_Final_EN - Flipbook - Page 141
T H E P LUMB LI N E | A RETU RN TO F I RS T PRI N CI PL ES
Canadian federal debt
forecast
$1.8tln
$1.2tln
$0.6tln
$0.0tln
1961
1970
1979
Public Debt
1988
1997
FES 2024
2006
2015
2024
Latest Budget
Sources: Scotiabank Economics, Department of Finance - Canada.
Note: FES - Fall Economic Statement 2024
Federal Reserve’s easing pains
After cutting rates in December, the FOMC’s current easing cycle is halfway through the original
projections of 4-5 rate cuts by the summer of 2026. The U.S. government shutdown – the longest
in history – deprived the central bank of economic data in Q4 and briefly raised doubts about
consecutive rate cuts in October and December, but the FOMC felt it had enough data to proceed
to cut.
The messaging coming out of the December meeting centered around the weakening U.S.
employment picture and the committee dismissed any concerns around tariff impacts on inflation
as temporary. But the larger dynamic is that the Fed remains anything but united, with a record
number of dissenters as the dual mandate discussion continues and many members appear
reluctant to pursue further easing.
Regardless of the nomination for the Federal Reserve Chair, we are of the view that the easing cycle
should continue for most of 2026. The U.S. jobs data has been weak for a stretch as nonfarm
payrolls have been averaging only 17,000 for the past six months. The unemployment rate has
been steadily climbing – albeit from a low base – hitting a 4-year high of 4.6% in November. Adding
to the mix, bank reserve liquidity concerns and the introduction of the Reserve Management
Program (RMP) points to an overall accommodative monetary policy going forward. An additional
concern to add to the list is how the Supreme Court will rule on the use of the IEEPA as a legal
justification for reciprocal tariffs. A Supreme Court ruling that goes against the White House’s tariff
policy would likely bring more legal challenges but also undermine the sustainability of tariff
revenue and potentially add to further curve steepening.
US Q3 real GDP climbed to 4.3% quarter over quarter, was stronger than expected and driven by
consumer spending and AI-related investment. The AI/capex boom will continue but it won’t
necessarily translate into jobs growth and is unlikely to reverse the labour market weakness, which
has been evident since April. We see inflation as largely contained while employment data is
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