Federal Reserve's Tightrope Walk: Navigating Inflation Amid Tariff Turmoil

The US Federal Reserve has a delicate task ahead, as it must carefully time its interest rate cuts amidst potential inflation spikes due to new tariffs. A report by Union Bank of India underscores that the next three to six months are crucial for policy decisions.

Investors are currently expecting a 60 basis point cut in the Fed rate by 2025, followed by another 70 basis points in 2026. These expectations endure despite concerns that tariff measures could cause a short-term rise in inflation.

Participants believe the inflation bump will fade as higher import costs stabilize by late 2025, and slower economic growth with recession risks will contain underlying inflation. By 2026, it is expected that supply chains will adjust away from tariffed sources, alleviating price pressures further, allowing the Fed room to cut rates.

However, the report warns that the economy's performance appears mixed, with stronger 'hard' data on output and employment. In contrast, 'soft' survey data reflects cautionary sentiment—a divergence that might influence future market pricing as the full impact of tariffs emerges.

(With inputs from agencies.)