From the Desk

As expected, the U.S. Federal Reserve held rates steady when it met this week. Tariff uncertainty is certainly keeping the central bank alert, but there is not much the Fed can do until more details emerge. 

One of the most interesting comments in the Fed’s formal statement was “The committee is attentive to the risks to both sides of its dual mandate and judges that the risks of higher unemployment and higher inflation have risen.” The Fed is essentially saying that it is more concerned about stagflation. Such a dynamic of higher inflation but with weak activity would be an extremely awkward mix for the central bank to manage through interest rate adjustments. Meanwhile, markets still expect three rate cuts this year. They seem to be concluding that while tariffs may limit growth, they should not incite persistent inflation. 

This gets to the inflation challenge. If tariff negotiations result in a stable settlement, then any resulting price hikes should be a one-time hit with normal inflation increases after that. However, tariffs and retaliations could become an ongoing threat. Then, inflation expectations could become unanchored, with the risks of tariff hikes and supply chain interruptions lurking in the background.

Sources: Bloomberg, Financial Times, 2025.