Michael Barr follows the Federal Reserve’s strategy. The US economy remains stable with low and steady unemployment, and disinflation persists. Nonetheless, inflation may rise due to the impact of tariffs.

Tariffs could also lead to economic slowdown and increased unemployment. Barr maintains a cautious approach, aligning with expectations. The likelihood of an interest rate cut has decreased to 18% from 25% the previous day.

Impact Of Tariffs

The current stance from Barr aligns with the broader tone set by monetary authorities, indicating confidence in the existing stability of the US economic model. Steady job markets coupled with a gentle downward trend in inflation suggest that broader macroeconomic pressures are not, at least for the time being, driving a need for an expedited policy shift. However, the growing concern over imposed tariffs presents a different kind of risk — one not rooted in domestic demand but in external costs feeding into the supply chain.

Higher import duties have a habit of feeding into consumer prices directly, and although current inflation dynamics are subdued, this added pressure could easily reverse some of the hard-won disinflation progress. If passed on to consumers, this translates quickly into headline inflation rises. From a trading desk perspective, this complicates rate outlook forecasts. Short-duration exposures could be vulnerable, particularly around upcoming data prints, where any surprise on consumer price inputs could spark a swift move in rate expectations.

Barr’s cautious tone merely confirms what we’ve seen priced into futures. Implied probabilities for a rate cut in the next meeting have slipped toward single digits, falling from 25% to 18% overnight. That’s a clear message from markets: the path to easing is no longer viewed as a near-term probability. As a result, short gamma positions that rely on increased monetary momentum might need to be reconsidered. There’s no urgency among policymakers, and without that, volatility on the front-end may remain compressed until new catalysts emerge.

Risk Of Asymmetry

What’s more, with economic deceleration a potential result of these trade measures, there’s a real risk of asymmetry in rate policy impact. Price pressures and growth headwinds moving in opposite directions make clean positioning more difficult. Yield curve strategies may need adjusting; we’re watching for possible steepening moves should inflation persist higher while rate cuts stay off the table.

From our perspective, it’s worth considering the recent shrinking of cut expectations not just as a shift in sentiment, but as a reset of base case assumptions. That affects premium pricing across options in both interest rate and inflation-linked contracts. Participants should be guarding tail risk with tighter hedges, particularly beyond the summer policy meetings.

With unemployment stable for now and no immediate signs of labour softening, monetary policymakers are clearly betting on patience. That calm on their part doesn’t necessarily translate to inactivity on ours. Positioning around volatility, both realised and implied, will need to be dynamic — especially if headline inflation edges above comfort levels yet again.

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