The Fed will deliver three rate cuts this year, Scotia says

Scotiabank said in its Global Outlook and Forecast Tables released Jan. 15 that forecasting risks have intensified, even as recent U.S. economic data have modestly improved the near-term growth outlook for both the U.S. and Canada.

In a note authored by Scotiabank Senior VP and Chief Economist Jean-François Perrault, the bank said geopolitical tensions, trade policy uncertainty, fiscal risks, and questions around monetary policy independence are creating a “multi-dimensional” risk environment, raising the likelihood of another year of volatile forecasting.

Assuming major downside risks do not materialize, Scotiabank expects U.S. growth to slow through the forecast period, while Canadian growth accelerates in 2027 as excess supply fades. The U.S. economy is expected to remain in excess demand, while Canada’s output gap gradually closes.

The bank noted that political pressure on the Fed could result in looser policy than economic fundamentals alone would justify…

The bank now projects U.S. real GDP growth of about 1.9% in 2026, down from roughly 2.1% in 2025, before recovering modestly to 2.0% in 2027. Despite slowing growth, inflation is expected to remain above target, with core inflation hovering in the mid-2% range through 2026 and easing toward 2.3% in 2027. Persistent excess demand, tariff-related cost pressures, and sticky services inflation remain key challenges.

Scotiabank expects the Federal Reserve to deliver three additional rate cuts this year, bringing the federal funds rate to around 3%, reflecting a policy bias toward supporting the labour market and tolerating modest inflation overshoots. The bank noted that political pressure on the Fed could result in looser policy than economic fundamentals alone would justify.

In Canada, Scotiabank expects real GDP growth to average about 1.5% in 2026, with underlying momentum improving through the year, before accelerating to 2.0% in 2027. Growth is expected to be supported by easing trade uncertainty, U.S. resilience, and government spending, though structural constraints such as weak productivity and slower population growth remain a drag.

Canadian inflation is projected to trend gradually toward the 2% midpoint of the Bank of Canada’s target range in 2026, although core inflation is expected to remain sticky in the upper half of the band. Scotiabank expects the Bank of Canada to remain on hold in the near term, citing uncertainty around CUSMA renegotiations, before beginning to withdraw stimulus later in 2026. Under its base case, the next policy move would be a rate hike in the second half of the year.

The bank emphasized that CUSMA remains a key wildcard for Canada’s outlook, warning that a failure to reach an orderly renegotiation could materially raise effective tariffs and weigh on growth.

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