Six straight holds later, the Bank of Canada still trails its US counterpart by more than a percentage point, and the currency has already started to move
Fed chairman Kevin Warsh used his speech in Wyoming to lay out a firmer, more hawkish case on inflation than markets had heard from him before. The shift now puts more distance between where US rates might be headed and where the Bank of Canada currently sits.
That distance is not academic for Canadian advisors. The Fed’s benchmark rate has sat at 3.50 to 3.75 per cent since December, while the Bank of Canada has held its own rate at 2.25 per cent for six straight announcements. That’s already a gap of up to 150 basis points, and a Fed move toward a hike in September would push it wider still.
The loonie has already started to feel it: USD-CAD climbed to roughly 1.39 by the end of last week. It’s up from a three-month high for the Canadian dollar just a week earlier, with currency trackers pointing to Warsh’s firmer tone as one reason the US dollar found support.
Why July needed fixing
Warsh’s first two press conferences left investors unsure what he actually believed, and that confusion sent bond traders scrambling to sell off long-dated debt. At Jackson Hole he came about as close as he’s likely to get to saying a rate hike is on the table if inflation doesn’t cooperate.
He called elevated prices the Fed’s main concern and said financial conditions are no longer restrictive in the way he’d described them in July.
“We can be held accountable for delivering on our remit, the only true test of our credibility,” he said, waving off the widely shared view that he’d come across as unclear the first time around.
The backdrop had already shifted just weeks before Warsh took the podium. A surprisingly weak US jobs report landed in early August, and it briefly took some heat off the idea of a September hike.
The numbers Warsh leaned on
The Fed’s long-standing target is 2 per cent annual inflation on the personal consumption expenditures price index. Some economists had read Warsh’s July comments as an opening to loosen that goal. He shut that door at Jackson Hole, calling the 2 per cent target “firm, fixed.”
He then walked through his own math. Of the components that make up PCE inflation, 54 per cent have run above 3 per cent annualized over the past year, and 49 per cent have done so over the past six months.
Those numbers sit below pandemic-era peaks but still above trend. He pointed to the consumer price index too, currently at 3.4 per cent, and said plainly that every measure he looks at “tells a similar story.”
On why the Fed held off in July, Warsh said: “A good majority of my colleagues and I thought the wiser course was to await new information in the intermeeting period.”
A firmer hand on the tools he’ll use
Warsh also pushed back on the idea that he’d be slow to reach for rate increases.
“Short-term interest rates are the predominant tool to achieve the dual mandate,” he said. That’s a notable line given President Trump, who put him in the job, has spent months pushing publicly for cuts.
On artificial intelligence, Warsh said the Fed is watching closely but isn’t building AI into current decisions.
A task force studying its economic effects has produced “encouraging” early findings, he said, though nothing yet with “no bearing on decisions we make in the current policy conjuncture.”
That’s a change from his earlier position, when he suggested AI progress might justify lower rates, a line that lined up with Trump’s own preferences. His past talk of trimming the Fed’s balance sheet was also absent from Friday’s remarks.
The politics sitting underneath it all
Trump hasn’t let up on his calls for lower rates, and some in the market suspect Warsh is waiting until after November’s midterms before acting on his hawkish instincts.
The two have spoken directly since Warsh took over, a break from the norm of routing Fed-White House contact through the Treasury Secretary.
The tension between the White House and the Fed had already produced one major legal fight this year. In late June, the Supreme Court ruled 5-4 against Trump’s attempt to remove Fed Governor Lisa Cook while her case against him continues. It confirmed that a governor can only be pushed out “for cause,” a bar the justices said needs to be a high one.
The ruling didn’t settle whether Cook can ultimately be removed, but it drew a firmer line around the Fed’s independence than existed before. It landed roughly two months ahead of Warsh’s most closely watched appearance yet at Jackson Hole.
What it means on this side of the border
Recent numbers back up Warsh’s inflation worries. Core PCE came in at 3.3 per cent in June, well above target, and one recent outlook from Franklin Templeton described Warsh’s approach as adding its own layer of uncertainty to markets, with the firm expecting the Fed will eventually need to tighten policy further.
The same outlook noted the Bank of Canada has been easing off its own hawkish tone, which only widens the gap Canadian advisors are already tracking between the two central banks.
The two central banks are on different clocks this fall. The BoC’s next decision lands September 2, with bond markets currently pricing almost no chance of a move either way. The Fed’s own decision follows in mid-September, based on Warsh’s own timeline for the next meeting.
Warsh hasn’t taken concrete action yet, and Friday’s speech stopped short of a promise. But it gave his colleagues cover to back a hike in September if he wants one. For advisors watching the currency and their clients’ cross-border positions, that gap between the two banks’ September calendars may be worth marking down now.
