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Deputy Prime Minister Chrystia Freeland and U.S. Treasury Secretary, Janet Yellen, tour Evoco, a biotechnology company that uses plant-based materials to replace petroleum products and reduce carbon emissions, at the MaRS Discovery Centre Lab in Toronto on June 20.Tijana Martin/The Canadian Press

Finance Minister Chrystia Freeland and U.S. Treasury Secretary Janet Yellen have pledged to help central banks tackle inflation by cutting back on deficit spending, but Ms. Yellen was cool to reopening Keystone pipeline talks as a way to reduce oil prices.

The two politicians made the comments on Monday, during a day of events in Toronto that included private meetings, a public, hour-long armchair discussion and an afternoon news conference.

Consumer prices on both sides of the border are rising at the fastest pace in decades – pushed higher in recent months by surging oil prices. High inflation is eroding wages and forcing the U.S. Federal Reserve and the Bank of Canada to rapidly increase interest rates in an effort to cool down demand.

Ms. Yellen said addressing inflation is primarily a responsibility of central banks, but added that she and U.S. President Joe Biden are considering a range of policy options that could help, including reducing the deficit, and raising some taxes while considering a gas tax cut.

The Alberta government has urged the Biden administration to address high oil prices by reversing its 2021 decision to cancel the Keystone XL oil pipeline that would have carried Canadian crude to U.S. refineries. Ms. Freeland said she raised the matter of Keystone privately on Monday, but Ms. Yellen indicated she did not view it as a solution to high prices.

“I don’t see it as short term measure to address the current situation. And longer term, we remain committed to our climate-change objectives. But you know, it’s really up to the President to consider,” Ms. Yellen said, during the afternoon news conference.

Ms. Yellen did express openness to the idea of a short-term cut in gas taxes.

“Consumers are really hurting from higher gas prices. It’s been a substantial burden on American households. And I think, while not perfect, it is something that should be under consideration as a policy to address it,” she said.

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Ms. Freeland, who hears daily calls – including on Monday in the House of Commons – from Conservative MPs to reduce gas taxes, said she is not ruling anything out. However, she said, a cut to the gas tax would hurt government efforts to shrink the deficit, and pointed out that Canada’s climate-change policy provides payments that offset the costs to consumers of carbon pricing.

“The situation in Canada is a little bit different, because our price on pollution does include an element where we return the money to Canadian families,” she said, adding that Canada is “prepared to do more if necessary.”

Inflation was already at multi-decade highs at the start of the year. The oil price shock after Russia’s invasion of Ukraine made matters worse. The annual rate of inflation hit a 40-year-high of 8.6 per cent in the U.S. in May, and a 31-year high of 6.8 per cent in Canada in April. Canada’s consumer price index data for May will be published on Wednesday, and most economists expect it to be well above 7 per cent – a number not seen since the early 1980s.

The U.S. government has tried to bring oil prices down by releasing a million barrels of oil daily from the country’s strategic reserves. Ottawa has said it wants Canadian energy companies to increase oil production by around 200,000 barrels per day, and natural gas by the equivalent of 100,000 barrels per day, by the end of the year. Canada exports about 3.5 million barrels of oil to the U.S. each day.

“As an energy producer, we take our responsibility to our allies really seriously, and so we are working hard to increase production,” Ms. Freeland said.

Lisa Baiton, president and chief executive officer of the Canadian Association of Petroleum Producers, said energy companies are in discussions with the government about increasing production, but transportation issues could hamper the efforts.

“Currently, Canadian producers are reaching record production and record exports. However, our transportation infrastructure is nearing capacity and will only grow by just over a half million barrels per day with the completion of the Trans Mountain expansion next year,” Ms. Baiton said in an e-mailed statement.

Ms. Freeland said both federal governments have to “walk and chew gum on energy right now” – encouraging increased production to bring down prices today while investing in more renewable energy sources.

“The energy crisis that [Russian President Vladimir] Putin’s invasion of Ukraine has prompted is yet another reason to take climate action really seriously,” she said.

During the midday armchair discussion, Ms. Yellen and Ms. Freeland called for like-minded democratic nations to deepen trade ties as part of a global effort to reduce dependence on goods from China and Russia.

Ms. Freeland said Russia’s invasion of Ukraine and China’s nearly three-year detention of Canadians Michael Kovrig and Michael Spavor, who were released last year, underscore the need to shift trade away from those two countries in favour of “friend-shoring,” a phrase Ms. Yellen frequently uses.

“The world’s democracies do not want to depend on Russia and China for the critical minerals and metals it takes to build electric batteries, or semiconductors, or to power nuclear reactors, or to create fertilizer, or even for sources of energy. That is just not safe anymore,” Ms. Freeland said.

“And guess who has almost all of this stuff? We do. Canada does. And I personally think we owe it to our allies as good partners to really step up. But it’s also a great economic opportunity for our country,” she said.

Ms. Yellen said that the U.S. and Canada are in discussion about securing North American supply chains for critical minerals, although she said the talks are at a relatively early stage.

Conversations about supply chain security are happening as the economic outlook worsens. High inflation is squeezing household finances and reducing consumer confidence. Meanwhile, central banks are raising interest rates at the fastest pace in decades in the hope of preventing high inflation from becoming entrenched. That’s increasing the chance that central banks tighten monetary policy too much and push their economies into recession.

Ms. Yellen said in a Sunday television interview that she expects the U.S. economy to slow. “But I don’t think a recession at all inevitable,” she said.

This assessment is shared by economists at Toronto Dominion Bank, led by chief economist Beata Caranci, who moderated the discussion with Ms. Yellen and Ms. Freeland on Monday.

“Growth is expected to fall meaningfully below its long-run trend pace in both the U.S. and Canada, and unemployment rates are forecast to rise from their current low levels,” Ms. Caranci and her team wrote in an updated economic forecast published on Monday. “We are not forecasting a recession, but with growth close to stall speed, there is a very thin margin for error if another shock hits economies.”

Some economists say Ottawa is not doing enough to dial back fiscal spending in the face of surging inflation. Bank of Nova Scotia chief economist Jean-François Perrault and director of modelling and forecasting René Lalonde published a note over the weekend arguing that government spending is making the Bank of Canada’s job harder.

“The simple reality is that firms and households are going to be making trade-offs as they incorporate higher inflation and financing costs in their budgets. It seems unreasonable for governments not to do the same,” they wrote.

During the Monday news conference, Ms. Freeland rejected the suggestion that the government was not being fiscally responsible, arguing that the April budget put Canada on the path to having the fastest debt and deficit reduction in the G7 – tied with the United States.

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