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The US Federal Reserve will have to time its interest rate cuts carefully as new tariffs could push inflation higher next year, making policy choices over the next three to six months particularly crucial, according to a report by Union Bank of India.
The report highlighted that markets are currently pricing in a 60 basis points (bp) cut in the Fed rate during 2025, followed by an additional 70 bp cut in 2026. This is despite warnings from some academics that tariff measures could lead to a spike in inflation in the near term. It stated "Policy choices over the next three to six months are crucial. The Fed must time its easing carefully". As per report, investors, believe that any tariff-driven price rise will be temporary. Their reasoning is two-fold, first, the inflation bump is expected to fade once the one-off adjustment to higher import costs is completed by late 2025, second, slowing economic growth and rising recession risks will curb demand, keeping underlying inflation under control. The report also mentioned that by 2026, supply chains are expected to adjust toward non-tariff sources, which should further ease price pressures. As a result, markets are looking past the short-term inflation flare-up and are betting that a weakening economy will provide the Fed with both the room and the need to ease rates more aggressively. However, the report cautioned that the situation remains volatile and requires close monitoring. In the first half of 2025, as per report, the US economy's performance has been mixed. "Hard" data, such as actual economic output and employment, has been more positive compared to "soft" data, which includes surveys and sentiment measures. This divergence has been a key trend in recent months. According to the report, in the coming months, the true impact of tariffs will become clearer and could influence market pricing. (ANI)
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