The front facade of the Marriner S. Eccles Federal Reserve Board Building in Washington on Thursday during a massive renovation.Andrew Harnik/Getty Images
The Bank of Canada and the U.S. Federal Reserve are expected to hold interest rates steady this week, while central bankers in both countries navigate waves of uncertainty created by U.S. President Donald Trump’s tumultuous trade policy and his attacks on Fed chair Jerome Powell.
Both central banks will deliver interest-rate decisions on Wednesday, only two days before the Aug. 1 deadline that Mr. Trump set to strike some sort of U.S.-Canada trade deal.
Financial markets and analysts expect the BoC to keep its policy rate at 2.75 per cent for the third consecutive time. The Fed is expected to keep the benchmark federal funds rate in the 4.25 per cent to 4.5 per cent range, where it has been since December.
Mr. Trump’s global trade war has created a chaotic backdrop for monetary policy, and forced central bankers into wait-and-see mode. Tariffs tend to increase consumer prices, adding to inflation − the No. 1 concern for central banks. But trade wars also tend to hurt economic activity and push up unemployment, which puts downward pressure on inflation over time.
That has left central bankers parsing the latest data to see which way inflation and other economic indicators break, instead of trying to set interest rates based on forecasts.
U.S. President Donald Trump says his Thursday meeting with Federal Reserve Chair Jerome Powell was ‘good,’ despite their bickering over the cost of the of renovations to the Fed’s headquarters.
The Associated Press
In its most-recent quarterly Monetary Policy Report in April, the Bank of Canada opted not to publish a central forecast given the extreme level of uncertainty, both over the trajectory of U.S. tariffs and how trade disruptions will filter through the economy and into consumer prices. Instead, it outlined upside and downside scenarios.
“One uncertainty is whether they boycott the forecasting game again and leave us a little bit in the dark,” Derek Holt, head of capital market economics at Bank of Nova Scotia, said in an interview. “And honestly, I wouldn’t blame them. I don’t think they have any further clarity on trade policy and fiscal plans now than they did in April.”
The Fed is dealing with an additional complication. In recent months, Mr. Trump has repeatedly attacked Mr. Powell, calling the Fed chair a “numbskull” and lambasting him for not cutting interest rates. This campaign escalated in recent weeks with Mr. Trump reportedly drafting a letter to fire Mr. Powell that he showed to members of Congress.
The President has retreated somewhat over the past week, saying he isn’t planning on firing Mr. Powell, whose term as chair ends next May.
But his relentless calls to cut interest rates and his attacks on Fed leadership – which have recently included criticism about cost overruns on Fed building renovations – have made life difficult for the independent central bank.
So far, Mr. Trump’s tariffs have not led to widespread price shocks in the United States that many economists have been warning about, and which has kept the Fed on a hawkish footing.
But U.S. inflation has begun to tick higher, rising to an annual rate of 2.7 per cent in June from 2.4 per cent in May. And economists think more inflation is likely in the pipeline for the second half of the year as U.S. importers run down inventory they built up before the tariffs came into force, and the U.S. labour market remains tight.
Royal Bank of Canada economists Mike Reid and Carrie Freestone said in a note to clients that the Fed may need to remain on hold through the fall, with a risk that it “will need to continue to wait to start a cutting cycle, until such time that the tariff impacts subside, likely not until 2026.”
After cutting its policy rate eight consecutive times in 2024 and early 2025, the Bank of Canada has been on hold since April. There’s little chance that’s going to change this week, with financial markets pricing in less than 10-per-cent odds that the bank will cut on Wednesday, according to LSEG data.
U.S. President Donald Trump publicly scorns Federal Reserve Chair Jerome Powell for renovation costs as the two toured the building. Trump says the project cost US$3.1-billion as Powell figures out the new, higher figure includes a renovation that was finished five years ago.
The Associated Press
The main reason is that inflation remains on the hot side. Annual Consumer Price Index inflation in Canada was 1.9 per cent in June, which is below the central bank’s 2-per-cent target. But the headline number is being dragged down by the one-off removal of consumer carbon pricing this spring.
Measures of core inflation, which capture underlying price pressures, have been stuck around 3 per cent since April and edging higher on a monthly basis.
Other recent economic data have also come in stronger than expected, mitigating the need for an emergency rate cut to support the tariff-battered economy. Canada added 83,000 jobs in June and the unemployment rate moved down a notch to 6.9 per cent. Gross domestic product grew a respectable 2.2 per cent in the first quarter.
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“If you haven’t won the last battle [over inflation], and you don’t know what to expect going forward, you probably just sit on your hands,” said Mr. Holt.
With a hold fully priced-in, the main question is what signal BoC Governor Tiff Macklem will send in his press conference on Wednesday.
In a June speech, Mr. Macklem said that “there could be a need” for more rate cuts if U.S. tariffs continue to hammer the Canadian economy and inflation remains under control. Analysts and investors will be watching for further hints about where rates might go.
Interest-rate swap markets are currently pricing in only one quarter-point cut by the end of the year. Some Bay Street economists, including Mr. Holt, think the bank is done cutting for the year altogether.
Other economists, however, think the bank will likely need to resume cutting in the fall, as the negative impact of Mr. Trump’s trade war on the Canadian economy becomes more clear.
So far, the tariffs have been masked by a spike in Canadian exports to the U.S. in the first quarter as companies rushed goods across the border to beat the levies, said Darcy Briggs, senior vice-president and portfolio manager for Franklin Templeton, who oversees Canadian fixed-income strategy.
Companies are passing rising tariff costs on to U.S. consumers, real-time pricing data show
But that dynamic will likely go into reverse in the second quarter, Mr. Briggs said in an interview, weighing on Canadian GDP. Moreover, trade uncertainty has frozen business investment, and Canada could face additional trade shocks if Mr. Trump proceeds with sectoral tariffs on copper, lumber and pharmaceuticals, among other industries he’s threatened.
“The ultimate magnitude and duration of these tariffs are completely unknown because you could come to an agreement and that could be in place for a month and then, [Mr. Trump could say], ‘You did something we don’t like, so we’re going to reopen that up.’ So it just freezes everything, because a handshake doesn’t mean it’s a final deal,” Mr. Briggs said.
“If the Bank of Canada is truly a risk manager, come September they’re going to have to take some insurance,” he said, referring to a rate cut.
A Reuters poll of 28 economists last week found all expect the BoC to hold rates steady on Wednesday. Nearly two-thirds think the bank will cut in September, and see at least two cuts by the end of the year.