News

• We will be moving away from goals for the balance of the year, perhaps we can resume next year
• Tariffs are higher than we expected even in our upside case
• To the extent it takes longer for tariffs to hit, that risks higher inflation expectations
• Our role is to make sure this is a one-time increase in prices only
• CEOs he spoke with yesterday say uncertainty and imports are ‘a huge issue’
• Notes that covid shortages of chips led to disruption of autos and it contributed to inflation
• We are still at full employment
• Tension between goals would be a difficult position for the Fed
• We could well be in that situation and it will be a very difficult judgement
• There isn’t a modern experience for how to think about high tariff rates — these are higher that Smoot-Hawley

The stock market is selling off on his comments

This article was written by Adam Button at www.forexlive.com.

• Growth likely slowed in Q1
• Economy solid despite heightened uncertainty and downside risks
• Inflation is a bit above 2% goal, has come down a great deal
• So far larger than expected tariffs likely mean higher inflation and slower growth
• Sharp decline in business, household sentiment and elevated uncertainty reflect trade policy concerns
• Labor market solid, broadly in balance, not contributing to inflation
• PCE prices likely rose 2.3% in the 12 months through March
• Admin policies still evolving, effects remain uncertain
• We may find both sides of mandate challenged, if so, we would consider how far economy is from each goal and potential time horizons for those gaps to close

These comments don’t sound like anything different from the Fed press conference. The initial reaction is stock market selling as many were hoping for a dovish shift like Waller.

I think that final line about gaps closing could be viewed dovishly as inflation shocks are likely to be more of a one-off while economic weakness tends to snowball.

FX moves have been minimal.

This article was written by Adam Button at www.forexlive.com.

Fed Chairman Jerome Powell is set to speak at the bottom of the hour. Ahead of that, the market is pricing in a 16% chance of a cut in May and a 76% chance of a cut in June.

Waller made a dovish shift this week but other Fed officials have been preaching patience and not looking through tariff price shocks.

This article was written by Adam Button at www.forexlive.com.

Today’s press conference won’t be on Tiff Macklem’s highlight reel.

The Bank of Canada Governor struggled to offer any kind of guidance about policy going forward or even a framework for how to think about trade war policy.

Instead, he struggled through a series of canned, disjointed talking points. In one instance, he repeated that they are ‘navigating carefully’ three times after referring to his notes. Later, he said that they were prepared to ‘act decisively’ only to try and redefine the term to say it wasn’t a code and really meant that they would be flexible and adaptable.

Acting decisively sounded more like wishful thinking from a central bank leader who repeatedly longed for some clarity in the economy or on tariffs. That’s a fanciful wish in Trump’s world and he would be better off to highlight likely reaction functions.

It would have been useful to wade into the debate about the transitory effects of tariffs and whether they would cut even with rising short-term inflation because of longer-term downside growth and inflation risks. Instead, he offered little useful commentary and both him and Rogers played down their own newly-released MPR forecasts.

A rare moment of honesty and straight-talking came when he talked about everyone was feeling the ‘erratic, unpredictable course of US trade policy’.

At times he tried to fall back on a pledge to ensure price stability and if you were to pick out one helpful line for businesses it was that the BOC would do everything it could to support the economy while respecting its mandate. Had Macklem leaned into that line of messaging, it would have been a successful press conference. Instead that was muddled by a rambling, unsure delivery and a lack of any useful guidance.

For now, the market is pricing in another 50/50 decision at the June 4 meeting and 47 bps of easing by year end. USD/CAD is down 73 pips on the day and fell about 45 pips after the rate decision but that only makes the loonie a mid-performer today amidst broad USD weakness.

This article was written by Adam Button at www.forexlive.com.