U.S. Federal Reserve chairman Jerome Powell recently faced criticism from former President Donald Trump regarding the central bank's focus on diversity, equity, and inclusion practices. Trump claimed these practices hindered the Federal Reserve's efforts to combat inflation. Concurrently, Bank of Canada governor Tiff Macklem addressed a global central banking conference in Mexico City, emphasizing the importance of clarity in monetary policy amid growing economic challenges.
Macklem highlighted that while monetary policy can mitigate short-term impacts of tariffs, it cannot resolve every economic challenge. He noted that inflation has decreased in Canada and many other countries, yet central banks face increasing difficulties due to a range of factors. These include higher long-term interest rates, slower economic growth, geopolitical tensions, rising trade protectionism, the advent of artificial intelligence, and more frequent catastrophic weather events.
"We didn’t get everything right through the pandemic, and elevated inflation and higher interest rates have been difficult for our citizens," Macklem admitted. "But in Canada, as in many other countries, inflation has come down. And we restored low inflation without causing a recession or major job losses."
The Bank of Canada has been reducing its key interest rate since last year to encourage spending and stimulate the economy. However, the country faces significant uncertainty with a month-long truce on tariffs from the U.S., as the federal government seeks to prevent Trump from imposing punitive duties.
“Significant, broad-based tariffs will sharply reduce demand for our exports," Macklem warned. "At the same time, a weaker exchange rate, retaliatory tariffs and supply chain disruptions will raise import prices, putting upward pressure on inflation.”
Macklem stressed the need for central bankers to remain independent, accountable, and continuously learning to build trust with the public.
“Being independent and accountable and continuously learning is how we build trust,” he stated. “In a world with more structural change and more negative supply shocks, central banks will be faced with harder choices. And harder choices bring risks of public disappointment and frustration.”
He further elaborated on the challenges faced by central banks when dealing with external forces beyond their control.
"We will face criticism about our decisions, and about how well monetary policy is seen to have worked when confronted with forces that are mostly out of our hands," Macklem acknowledged. "We will be called ineffective or criticized for not doing enough. And some will challenge our independence.”
The rise of artificial intelligence technology presents additional challenges for central banks, as they must adapt to new economic dynamics. In addressing these complexities, Macklem advised a careful assessment of inflationary pressures from economic activity and supply chain disruptions.
“Central banks can’t address weaker output and higher inflation at the same time,” he noted. “We will need to carefully assess the downward pressure on inflation from weaker economic activity, and weigh that against the upward pressures from higher input prices and supply chain disruptions.”
