Central banks are firing blanks in a trade war world

If this week made anything clear, it’s that central banks are increasingly spectators in the face of a full-blown trade war. The Fed stuck to its “patience” script, the Bank of Canada officially hit pause after a year of cuts, flagging the same monster hiding under the bed: inflation creeping back in as tariffs choke supply chains and break pricing models. That message didn’t sit well with equity markets, which stumbled again this week after last week’s jagged rebound.

But don’t blame bonds — Treasuries spent the week drifting lower in yield, with 10s down 20 bps to just under 4.3%, offering fleeting support. Currencies barely flinched either. The dollar was flat against the euro and the CAD, but slipped against the pound and the yen. Calm on the surface — but don’t confuse that for stability.

Because behind the scenes? Drama

Trump lit up Powell again, saying the Fed was “too late” and adding that “Powell’s termination can’t come fast enough.” That came a day after Powell doubled down on Fed independence. His term runs until 2026 — but technically, he can hang around on the Board through 2028 if he wants to make it awkward.

Waller, not walling off cuts

Meanwhile, not all Fed voices are in hawk mode. Governor Waller opened the door to cuts this week, noting that either inflation stays tame and the Fed can ease, or inflation blips higher but the economy caves in — either way, rates head lower. His message? It’s not about saving markets. It’s about managing fallout.

And the U.S. economy? Still officially in a “good place”… for now. But strip away the flashy post-COVID stimulus veneer, and cracks are starting to show. Sure, retail sales jumped 1.4% last month — best in two years, thanks to front-loaded auto buying, with cars in the tariff firing line. But look at sentiment: Philly Fed sank to -26.4 in April, a level that’s historically screamed “recession incoming,” and consumer confidence is plumbing multi-decade lows.

Cuts are coming — It’s just a question of when and how many

Despite Powell’s reluctance, the market sees cuts on the summer horizon—my call: three possible four cuts this year, starting in July. The market is sniffing something slightly earlier — June — and hence I’m waffling between three and four cuts in total. But it’s a dicey setup, with the fiscal side of the equation is still a wild card. Republicans can’t align on how much to cut taxes versus where to rein in spending. The market’s base case? Any tax relief will likely be offset by budget trims, making it a fiscal wash.

One thing’s not washing out though — the deficit. The U.S. ran a $2.07 trillion budget shortfall over the past 12 months, nearly 7% of GDP. And customs duties? Up 35% y/y in March, topping $8 billion — tariffs are punching through, and hard.

Global central banks: Same trade shock, different plays

Across the globe, central banks are wrestling with the same trade war chaos — but playing the game very differently. New Zealand has cut 200 bps, while Australia’s barely touched the dial. That’s flipped the RBNZ-RBA spread from +115 to -60 bps in a year, despite nearly identical inflation prints. Sweden’s slashed 175 bps; Norway hasn’t budged. The ECB added another 25 bps to its cutting cycle, now 175 bps in, while the BoE is still inching along with just 75 bps of easing.

Yes, the ECB cut — but let’s be real, it was more of a shoulder shrug than a game-changer. The street barely blinked. It was the kind of move that says, “We had to do something to halt the Euro appreaciation.” Markets see it for what it is: a token gesture.

Bottom line? No one knows what the “right” policy is in a world where geopolitics is dictating inflation, not demand. We’re in six-sigma territory here, and the central banks know they’re not in the driver’s seat anymore — they’re riding shotgun.