Economist outlines what meeting ‘double-feature’ told us about how central bank leaders are viewing impacts to inflation, GDP from US tariffs
US trade policy narratives dominated the conversation around the Bank of Canada (BoC) and US Federal Reserve’s separate decisions to hold their key interest rates steady on Wednesday. The BoC decision came with a monetary policy report which eschewed a base case in favour of outlooks at either the current tariff rate, a higher rate, or a lower rate. The Fed maintained its policy rate, largely on the cited basis of ongoing risks that tariffs may result in more than a singular shock to prices and might create more sustained inflation.
Neil Shankar, Economist at CI Global Asset Management, broke down what the two meetings mean for investors and advisors. He explained how each central bank is approaching ongoing tariff uncertainty and whether a mixture of trade deals, corporate earnings, inflation data, and GDP numbers have given us anything approaching clarity. He discussed, too, some of the politicization of central bank policy we’ve seen in the US and how that may be digested by markets.
“I think both central banks are just remaining in this data dependent wait and see mode and that was kind of the main takeaway from both meetings,” Shankar says. “I think for these policy makers… we’re starting to get some clarity on the tariff impacts in the inflation data, but I think there's a lot of the broader effects, particularly around employment, which tend to lag. The full economic impact of tariffs, I suspect, will take more time and data to assess, which is why you essentially have the central banks in data dependent wait and see modes for the time being.”
Inflation data in both countries, Shankar notes, is beginning to reflect the impact of tariffs. The United States has already seen an increase in goods inflation, though that has been offset by disinflation on the services side. The BoC’s current tariff scenario lays out the expectation of inflation at above three per cent. The uncertainty around these inflationary impacts, Shankar notes, have acted as drags on potential business investment and confidence, which can create downside risks to growth.
Shankar notes that some of the goods inflation we’ve seen has come on slowly and has been influenced by the front-running of tariffs seen in Q1. That has allowed many firms to avoid passing on tariff-induced price increases to the extent they might have otherwise been required to. What has surprised Shankar as an economist is that both the Canadian and US economies have stayed relatively resilient despite the growth shocks presented by tariffs.
Trump’s rhetoric and Fed independence
Focusing on the US Federal Reserve, there has also been a great deal of noise from the White House leading up to this meeting, with President Trump explicitly calling for Fed Chair Jerome Powell to cut interest rates. There has been speculation that the President’s recent focus on the cost of renovations to a Fed building in Washington was a means of exerting political pressure on the Fed Chair.
Despite the noise surrounding the Fed decision, Shankar’s view is that the US Fed has retained its independence and data-dependence. He echoes Powell in denying that Trump’s political pressure impacted the decision to hold interest rates in any way.
Even the fact that two Fed Governors, Bowman and Waller, dissented at the Fed meeting and argued in favour of a 25 basis point cut, has been cited as a sign of the Fed’s independence. In the press conference following the announcement on Wednesday, Chair Powell noted that the dissent was the product of a clear and well-articulated argument put forward by those two governors, but that the majority decision was to hold rates steady. Shankar notes that despite the fact that this was the first instance of two governors dissenting in decades, the current lack of clarity and possible growth shocks that could emerge from tariff policy would open the door to more disagreement on the direction of Fed policy.
For advisors trying to guide clients through the same uncertain environments that these two central banks just highlighted, Shankar emphasizes the power of reassurance.
“I think they should ultimately convey that, both central banks are closely watching the economic data as it comes in, and they remain prepared to adjust policy as needed. There was no change to policy to today, but both central banks retained the optionality to lower interest rates in the future, if that's what's warranted at the time,” Shankar says. “I think it's important for advisors to communicate to their clients that despite the political pressures and some of the market noise, monetary policy changes will continue to be measured and data dependent. And that was very clear, both at the Bank of Canada and the Federal Reserve.”
