FED: Federal Judge Throws Out Justice Dept Subpoenas

One area of perceived solidity in the economy: "Domestic demand was expected to continue to be resilient." 

• But elsewhere, strength was downplayed. On the labor market, "Looking at a broad set of indicators, members agreed that the labour market continued to be soft." We took note of the pessimistic word "yet" here in reference to weak employment in trade-related sectors: "While the decline in these sectors had not yet spilled over to other sectors, surveys showed that few businesses had plans to hire more workers in the coming months."
• The potential for a growth boost from fiscal policy didn't get much mention at the January press conference (compared with analysts' previews which pointed to stimulus as a reason to expect hikes by end-2026) though it was discussed by Governing Council who "agreed that provincial infrastructure spending and the measures outlined in the federal budget would support investment and overall growth going forward. While government spending was expected to contribute to GDP in 2026, the full impact on growth of these initiatives would take time to materialize."
• On inflation, "members agreed that CPI inflation was evolving as expected" with core measures easing to around 2.5% from 3% as recently as October, while 3-/6-month measures of CPI median/trim close to/below 2%, "which members noted was a sign of continued easing in core inflation." And other indicators suggested input and unit labor costs had eased.
• Overall, "The costs of reconfiguring trade routes and supply chains could put some upward pressure on inflation but was expected to be offset by downward pressure from excess supply. This would keep inflation close to the 2% target over the projection."

The deliberations of the Bank of Canada's January meeting struck a mixed tone on the Canadian economic outlook, one fraught with risks that left Governing Council uncertain over whether its next move would be a cut or a hike. "Governing Council concluded that the risks around the outlook had moved higher....Against this backdrop, members agreed that they would need to maintain optionality in setting monetary policy...Members [] agreed that it was difficult to predict the timing and direction of the next change in the policy rate. They would continue to monitor risks closely and were prepared to respond if the outlook changed." (Link here)

• Most of the discussion around the economy was a reflection of the updated Monetary Policy Report, with the overall outlook similar to the prior quarterly projections in October. To sum up, Governing Council members "agreed that the economy remained in a state of excess supply, which they expected would be gradually absorbed over the projection horizon."
• But we took note of the numerous references to trade uncertainty clouding the outlook. On exports, "the pace at which businesses will adapt to the evolving global trade environment was uncertain." Private sector "investment was likely to remain soft over most of 2026. As uncertainty related to US trade policy dissipates, investment should pick up."
• While some of the uncertainties were somewhat nebulous including "ongoing trade disruptions and structural adjustments in the economy" and "geopolitical tensions", more specifically it's clear that the BOC's outlook depends heavily on the outcome of the upcoming review of the free trade deal with the US and Mexico which is up for review this summer.
• The risks appear to be perceived to be to the downside (ie toward the next move being a cut), and the timing is such that it's unlikely BOC would be in a position to make any decisions on rate policy until the review has concluded: "The review of CUSMA is an important risk to the outlook. Members acknowledged that businesses could remain hesitant to deploy capital until they have more certainty about Canada’s trading relationship with the United States. Members noted that there was a broad range of outcomes of the review and recognized that a broadening of US tariffs on Canada would weaken growth further. To a certain degree, the federal government’s efforts to reduce Canada’s dependence on trade with the United States could support export growth and investment over a longer horizon. Overall, members agreed that the CUSMA review posed a downside risk to economic growth. Inflation could be pulled down if the economy were to weaken, but higher import costs, potential counter-tariffs and supply chain disruptions could also push inflation higher."
• This will be a point of continual concern until resolved. Earlier on the day of release, CAD sold off after Bloomberg reported that "President Donald Trump is privately musing about exiting the North American trade pact, people familiar with the matter said, injecting further uncertainty about the deal’s future into pivotal renegotiations involving the US, Canada and Mexico."

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