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.
