In this Counsel Views double feature, RBC PH&N Investment Counsel's Chief Investment Strategist Tasneem Azim-Khan covers two important and timely analyses: the first on the upcoming CUSMA 2.0 negotiations, and the second on the U.S. Federal Reserve.
Federal Reserve independence under fire as dual mandate creates policy puzzle
The Federal Reserve finds itself navigating treacherous waters, caught between conflicting economic signals and unprecedented political pressure that threatens its cherished independence.
The Fed's recent quarter-point rate cut signals a dovish shift, with additional cuts anticipated through year-end, bringing rates to approximately 3.5%-3.75%. But this "insurance cut" masks a deeper dilemma: the Fed's dual mandate of full employment and price stability is pulling in opposite directions. While unemployment remains relatively low at 4.3%, core inflation has accelerated for three consecutive months, reaching just over 3% year-over-year – a worrying trend suggesting stagflationary pressures.
The challenge is compounded by operating in an "informational vacuum" regarding Trump's tariff agenda. With CUSMA renegotiations looming and Supreme Court decisions pending on tariff legality, the Fed cannot accurately predict future inflationary pressures. The massive $3 trillion "One Big Beautiful Bill" fiscal stimulus acts like additional rate cuts, potentially forcing the Fed to reverse course if inflation reignites.
More troubling for monetary policy independence, Trump has launched an unprecedented assault on Fed leadership. After dubbing Chairman Powell "Too Late Powell" and publicly criticizing his cautious approach, Trump attempted to fire Fed Governor Lisa Cook based on allegations of mortgage fraud. Cook successfully sued to block her removal, with the Supreme Court allowing her to remain pending January arguments.
These political machinations represent a dangerous erosion of Fed independence. Trump has already placed Stephen Miran as the new Council of Economic Advisors chair, replacing resigned governor Adriana Kugler. Combined with Trump nominees Christopher Waller and Andrea Bowman already serving as governors, the president is gradually reshaping the Federal Open Market Committee's composition.
However, recent voting patterns suggest independence hasn't completely crumbled. Despite expectations of multiple dissents, only Miran voted differently at the latest meeting – favoring a larger half-point cut rather than opposing cuts altogether.
Meanwhile, the Bank of Canada faces similar pressures, cutting rates to 2.5% amid a nine-year unemployment high and 1.6% GDP contraction, with additional cuts likely if economic data continues deteriorating.
Both central banks now operate with unprecedented uncertainty, maintaining flexibility while navigating political crosscurrents that threaten their credibility and effectiveness in managing monetary policy.
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