Federal Reserve Chair Jerome Powell stated that policymakers are pausing to assess the impact of tariffs on inflation. Should the labour market show signs of weakening, a reduction in interest rates may be considered.
Bank of America suggests inflation is above target with potential rising risks due to tariffs in the coming months. While a rate cut is possible if the labour market deteriorates, current inflation levels make it less likely.
Bank of America warns tariffs might increasingly impact the U.S. economy. They note that recent goods inflation could be due to anticipatory price increases before tariffs.
Federal Reserve Chair Powell attributed the absence of rate cuts to tariff effects during his speech in Sintra.
What we’ve seen so far is a blend of caution and conditionality from leading institutions. Powell, by stating policymakers are taking a step back to absorb tariff impacts before acting, essentially shifted the short-term bias away from imminent easing. This pause suggests that unless there’s clear evidence of strain in the job market, policy rates are staying put. Tariffs, already making prices less predictable, are complicating standard models of inflation transmission.
With inflation already above the Federal Reserve’s comfort zone, and Bank of America warning of forward-looking risks, there’s not much support for immediate policy adjustments unless data markedly worsens. Their note hints at the idea that businesses are accelerating price hikes in anticipation, rather than in response to actual increases in input costs. That’s important—it means the pricing pressure we’re observing might not be entirely persistent.
From our perspective, the key point here is not just the inflation number, but what’s feeding into it. If front-loaded pricing is occurring because of tariff fears, then inflation could ease back on its own in the quarters ahead. But we can’t bet on that without confirmation. Instead, we’ll need to keep an eye on whether core metrics soften without broader economic deterioration.
Powell’s remarks from Sintra cement the stance: rate cuts are off the table unless labour data begins to show clear weakness. His framing makes it plain that tariffs are muddying inflation readings enough that the central bank is less confident in pre-emptive easing. What this actually means in practice is a narrower path for rate adjustments—even a softening in non-farm payrolls won’t be enough unless it’s combined with moderation in prices.
For desk activity, this sets up a backdrop where front-end volatility could be subdued unless hard turns begin showing up in high-frequency prints. Tariff uncertainties, while noisy, haven’t yet translated into broad economic dislocation. That makes directional plays more challenging unless paired with clear data confirmation, namely in jobless claims and consumer spending figures.
Given that rate expectations are in flux, curve positioning should avoid assumptions built on reflexive cuts. Instead, repricing moves are more likely to be driven by labour trends than inflation alone. Powell gave us the framework—hold steady unless employment data forces the hand. Price pressures remain, but their source is too murky to justify preemptive easing.
In the weeks ahead, those of us trading macro volatility should focus on the scatter coming from real activity data more than headline CPI. Bond markets may remain sensitive to payroll surprises, more than CPI deviation, particularly if goods prices prove transitory. Use positioning to reflect time decay of tariffs rather than shock persistence.
