Every time Federal Reserve chair Jerome Powell meets the media for a monetary policy announcement, U.S. President Donald Trump is the ghost at the feast.

While the world's most powerful central banker did not actually cut rates Wednesday, as Trump has repeatedly ordered him to do, Powell saw it as a real possibility this time around — but only if the economy gets worse.

For Canadians, the strange new thing is that while the Fed chair talked to reporters about a U.S. economy going off the boil, Canada's is showing renewed strength. Just before Powell spoke, Statistics Canada's inflation numbers were the latest indicator the economy was on the upswing.

That opens the door to the prospect that if the U.S. does begin to cut rates later this year, the Bank of Canada's Stephen Poloz may not be forced to follow suit.

If so, for the first time in a long while, Canadian and U.S. rates would be converging — not because Poloz would hike, but because Canada would hold steady while the U.S. cut.

And if that happens, the loonie should begin to creep closer to the greenback. The first signs of that already happened Wednesday, with the Canadian dollar up half a cent.

Disappointing Trump

The Fed's decision not to cut its key interest rate came only a day after Trump once again seemed to threaten Powell with removal from his job.

"Let's see what he does," responded the U.S. president, when asked whether he would oust Powell, whom Trump had appointed, denying Powell's predecessor, Janet Yellen, a second term.

There were also fresh reports that Trump had previously asked White House lawyers how he could get Powell out of the job, seemingly to replace him with someone more compliant.

Most legal experts say it would be next to impossible to force the Fed chair out before the end of his appointed term, short of him doing something illegal.

Asked directly whether he would step down should the U.S. president call for his resignation, Powell was equally direct: "I think the law is clear that I have a four-year term and I fully intend to serve it."

U.S. President Donald Trump hinted again this week that he'd like to wave goodbye to the Fed chair he appointed. But Powell said he intends to complete his four-year term, even if formally asked to step down. (Carlos Barria/Reuters)

According to new dot plots, which chart the anonymous rate projections of Powell's fellow Fed policy-makers, there will be no interest rate cuts in 2019.

And despite so much gloom from Trump and many others, Powell remained surprisingly optimistic about the U.S. economy; consumer spending, which makes up three-quarters of the economy, had rebounded and remained strong, while job and wage growth was also firm.

Impatient for rate cuts?

Powell did confess to being worried that conditions were about to change. As the adepts who read the runes of central bank statements quickly reported, the word "patient" had disappeared from the latest version, implying the Fed was changing from a wait-and-see approach to something more active.

Despite Powell's apparent optimism, markets refused to listen. Immediately after the central bank's written report was released, the market prediction for a rate cut at the next meeting jumped from 80 to 100 per cent. Futures point to as many as three rate cuts by the end of the year.

Some of the comments made by Powell during Wednesday's news conference seemed to offer hope to those who want rates to fall sooner. He warned of "crosscurrents" — a meteorological euphemism for economic threats, similar to Poloz's "headwinds."

If markets are correct, Bank of Canada governor Stephen Poloz will be in a position to hold rates steady, even if the Fed begins to cut. That would narrow the gap between Canadian and U.S. rates, nudging the loonie higher. (Chris Wattie/Reuters)

There are signs that inflation had begun to weaken, Powell said, and business investment is in danger of slumping, partly due to worries over trade and partly due to signs the world economy has begun to slow.

Record-low unemployment figures did not stand in the way of cuts, said Powell.

The Fed thinks more workers yet could be drawn into the labour force for more hours, with Powell implying that the bank need not wait for a recession to cut. Instead, he said, the goal was to "sustain the expansion" so that it could reach out into parts of the economy that had not yet felt its effects.

With interest rates so close to zero already, he said, research suggests central banks are better off cutting sooner rather than waiting too long in order "to prevent a weakening from turning into a prolonged weakening."

In Canada, despite repeated gloomy warnings about a future housing slump, the latest economic signals remain strong.

The same type of futures market fully convinced of cuts south of the border sees something different here: The chance of a Canadian cut in July is pegged at less than 10 per cent, it shows, with a less than 50/50 chance by year's end.

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