Viewpoint

April 17, 2025 | 16:41

April 17, 2025

Economist

Chief Economist and Managing Director
Economics

Douglas Porter has over 30 years of experience analyzing global economies and financial markets. As Chief Econom... (Read more)

Sal Guatieri

Senior Economist and Director
Economics

Sal Guatieri is a Senior Economist and Director at BMO Capital Markets, with over two decades experience as a ma... (Read more)

Priscilla Thiagamoorthy

Senior Economist and Vice President
Economics

Priscilla joined BMO Capital Markets in 2016 and plays a key role in analyzing Canadian household trends and the... (Read more)

Douglas Porter , CFA

Chief Economist and Managing Director
Economics

Douglas Porter has over 30 years of experience analyzing global economies and financial markets. As Chief Econom... (Read more)

Sal Guatieri

Senior Economist and Director
Economics

Sal Guatieri is a Senior Economist and Director at BMO Capital Markets, with over two decades experience as a ma... (Read more)

Priscilla Thiagamoorthy

Senior Economist and Vice President
Economics

Priscilla joined BMO Capital Markets in 2016 and plays a key role in analyzing Canadian household trends and the... (Read more)

Our Thoughts

How Can You Mend a Broken Trade?

Central banks can’t do much to fix the damage from a trade war. That was the key theme from this week, as Fed Chair Powell continued to preach patience, and the Bank of Canada hit pause for the first time in a year. And both monetary authorities openly fretted about the potential for inflation to spark up again in a world of higher tariffs and kinked supply chains. Equity markets decided they didn’t like that message, and headed lower again this week after the jagged recovery last week. This time, there was no finger pointing at the bond market, as Treasury yields spent most of the week in a slow-motion descent, with 10s easing 20 bps to below 4.3%—no drama there. Currencies were also unusually calm this week, with the dollar barely changed on net against the euro and loonie, but a bit weaker versus the pound and yen.

But just because bonds and currencies were well behaved doesn’t mean the week was drama-free. Apparently, the Fed’s patience message wasn’t particularly well received at the White House, with the President posting in response that the Fed was “too late” and that “Powell’s termination cannot come fast enough”. This blast came a day after Powell spoke about the critical importance of an independent Fed. For the record, the Chair’s term expires in May 2026, although a footnote is that his term as Governor runs until 2028. It’s rare, but not unheard of, for a Chair to stay on the Fed Board (and thus still have a say and a vote on policy)—the last one to do that was Marriner Eccles from 1948-51. We’ll just note that the Fed’s HQ building in Washington is named after Mr. Eccles.

Notably, not every Fed voter is sounding as tough on holding the line. Governor Waller earlier in the week indicated that rates are likely headed lower amid a trade war, either the easy way—inflation stays mild—or the hard way—inflation temporarily jumps, but a much weaker economy eventually suppresses prices. But one area of agreement among most Fed officials is that the U.S. economy is in a “very good place”, to which we would add “for now”. All of the economic data need to be viewed through the lens of pre-trade-war preparation. A prime example was the hearty 1.4% pop in U.S. retail sales last month, the biggest rise in more than two years, albeit flattered by a wave of auto buying. But sentiment surveys are mostly crumbling, with the Philly Fed diving to -26.4 in April; for perspective, there has only been one case in the past 60 years when this metric was this low without the economy being in recession (spring 2023). Consumer confidence is even weaker, with the UofM survey probing 70-year lows.

Notwithstanding Powell’s caution, we and market pricing expect the Fed to begin cutting again by the summer. Our official view is for three trims this year, beginning in July, with markets currently leaning to a little earlier (June) and a little more (closer to four trims). Besides the intense complication of the roiling trade war, the U.S. fiscal position is also still up in the air, with Senate and House Republicans not on the same page on the appropriate mix of tax relief and spending restraint. Our working assumption has been that fiscal policy will end up being about a wash for the economic outlook, with any tax cuts balanced by spending trims elsewhere. The great limiter on tax cut ambitions is the groaning $2.07 trillion budget deficit over the past 12 months, equal to nearly 7% of current GDP. For the record, customs duties were just over $8 billion in March, up 35% y/y.

Every central bank is dealing with the complications arising from the trade war, a six-sigma event. (As an aside, Treasury Secretary Bessent complained this week that all of the focus is on tariffs, while proposed tax changes and deregulation are getting short shrift. The obvious retort is that the change in trade policy is outer-worldly and is fully upon us, while tax and regulation changes are run-of-the-mill.) And the response to the tariff uncertainty varies depending on how sensitive the economy is to U.S. trade, and the respective starting points for growth and inflation.

Even economies that appear to be similar on the surface could be traveling on very different rate paths. For example, New Zealand just cut rates again by 25 bps to 3.5% last week, bringing cumulative cuts to 200 bps, while Australia has trimmed but once to 4.1%. That has transformed RBNZ/RBA spreads from +115 bps a year ago to -60 bps now, even as their inflation rates have nearly tracked tick-for-tick. Similar story, Sweden has chopped 175 bps in the past year while Norway has held fast. Meanwhile, Thursday’s 25 bp clip by the ECB brings their cumulative cuts to 175 bps, while the BoE has cautiously cut by only 75 bps, widening out those spreads to the highest since 2008. The point is that no one is quite sure what the right response is to the trade war.