• Tiff Macklem cautions that reduced predictability in U.S. Federal Reserve policy, amid political pressures, could impact global financial stability and U.S. Treasury yields like the 5-year rate.
  • The Bank of Canada held its policy rate at 2.25% on January 28, 2026, projecting modest GDP growth but widening uncertainty due to U.S. trade policies and geopolitical risks.
  • Macklem highlighted threats to Fed independence, including President Donald Trump's nomination of Kevin Warsh as Fed chair and tensions with current Chair Jerome Powell, which could exacerbate market volatility.

In a recent Reuters interview, Bank of Canada Governor Tiff Macklem sounded the alarm on how a less predictable U.S. Federal Reserve could send shockwaves through integrated financial systems, with Canada particularly exposed. Speaking after the BoC's latest rate decision, which kept the policy rate steady at 2.25%, Macklem pointed to mounting political pressures in the U.S. that threaten to undermine the Fed's independence and, by extension, global economic stability.

"If U.S. Fed policy becomes less predictable, that's going to impact us all," Macklem said, emphasizing that such unpredictability would likely affect U.S. rates, including the 5-year Treasury yield. This warning comes as the BoC projects modest GDP growth of 1.1% in 2026 and 1.5% in 2027, with inflation hovering near the 2% target, but uncertainty has widened sharply due to factors like U.S. trade policies and geopolitical tensions. Macklem noted recent talks with Fed Chair Jerome Powell, stressing that a stable Fed benefits both U.S. and Canadian economies, but the current environment is anything but stable.

Efforts to maintain central bank autonomy have hit a snag, with Trump's criticisms of Powell escalating to include threats of criminal indictments and demands for rate cuts, alongside his nomination of Kevin Warsh as Fed chair. According to people familiar with the matter, these actions have prompted a joint statement from global central bank chiefs in support of Powell, highlighting the international concern over U.S. policy unpredictability. Macklem referenced specific risks, such as Trump's threats of 100% tariffs on Canada over a potential China trade deal and the looming CUSMA review, which could trigger trade shocks and labor market weakening in Canada.

Without a deal to stabilize U.S. monetary policy, markets might face increased volatility, as seen in the decoupling of fixed income yields from U.S. benchmarks and a weakened dollar as a global safe asset. Institutional investors are already shifting toward fixed income and international equities amid this turbulence, with Macklem underscoring the broad global effects. "You would expect to see some impact on the 5-year U.S. Treasury interest rate," he added, pointing to how foreign investors are hedging against uncertainty.

In the short term, the BoC plans to hold rates steady unless trade shocks worsen, potentially allowing for accommodations if inflation remains low, though money markets price no cuts through 2026 and see late-year hike risks. For now, the focus is on reporting current facts: Macklem's warnings, the BoC's cautious stance, and the real-time market data reflecting heightened anxiety. As one analyst put it, "This isn't just a U.S. issue; it's a global one that could reshape financial landscapes if left unchecked."