Insights 
VT 
Adjustment of prices due to trade and other policies is expected to be neither short nor simple, potentially taking a year or more. The labour market remains robust with no indications of major deterioration.
The U.S. is projected to experience a period of higher inflation. Given the current uncertainties, a shift in monetary policy is not advisable.
A Wait And See Approach
A “wait and see” approach on interest rates is considered suitable, particularly reflecting the economy’s resilience. There is a risk that elevated inflation may start affecting consumer psychology.
The Federal Reserve may need to more explicitly commit to stable inflation expectations within its framework. Businesses are postponing hiring and investments, anticipating demand stagnation or decline if costs continue to rise.
Recent positive inflation readings are attributed to businesses delaying price increases to gain clarity on final tariff levels.
These lines describe a complicated price environment shaped by international trade dynamics and internal policy manoeuvres. Importantly, the effects won’t unravel quickly. We’re looking at a period extending well into the next calendar year, not something that can be resolved over a quarter or two. The underlying labour situation, however, stands strong. Jobs are still being added, and existing positions aren’t showing widespread stress.
With that backdrop, the idea hinted at is clear: inflation isn’t coming down at the pace some had hoped, and it’s expected to stay above ideal levels. The policy response, then, has been one of caution. Rather than tighten too rapidly and risk pulling the brake on business activity, the Federal Reserve’s preference leans toward observational patience. It’s not about inaction; it’s about keeping options open while the real effects of current rates play out.
Consumer Psychology And Inflation Expectations
The remark regarding consumer psychology suggests something deeper—should prices remain elevated, even without fresh shocks, the way people think about spending could shift. If households begin expecting higher prices as the norm, they may start making purchases earlier than planned or cut back on discretionary expenses. Both outcomes can shift inflation trends further, up or down.
Powell and his colleagues might need to do more than just hint that they’re committed to price stability. Reinforcing that message clearly and repeatedly, possibly in policy language or press remarks, could help anchor expectations. That’s especially true if wage growth doesn’t slow meaningfully and services inflation stays sticky. At the moment, the belief is that current interest rate levels are restrictive enough, but they’ll refrain from declaring victory until numbers show a stable path downwards.
Hiring delays and deferrals in capital outlays, as noted, suggest that businesses are hesitant—not out of immediate distress, but uncertainty about costs. If input prices jump again, or if tariffs bite further into margins, we could see postponements turn into outright reductions.
The hesitation to raise prices immediately, even with cost pressures, tells us one thing: there’s bargaining happening between pricing power and customer retention. Companies are watching, just like us, for whether these tariffs become permanent fixtures or are rolled back after negotiation. Until that becomes clear, they’re staying restrained—at least those who can afford to.
From our view, this tells us that volatility in inflation prints may persist, especially if deferred price adjustments begin to roll through in successive quarters. That makes reading inflation data week to week all the more sensitive. We may see erratic moves in rate expectations tied to one-off shifts in retail or services pricing.
Long exposure to rate-driven products may need tighter hedging. We’d account for the possibility of sudden repricing, particularly following any Fed communication that sharpens—or alters—their current “watchful” stance. If we find that sentiment breaks and firms begin lifting prices broadly, the market may need to absorb that quickly. That affects everything tethered to expectations—from swap rates to option skew.
In rate derivatives, the slow process of transition doesn’t mean little action; it means more of it must be grounded in forward signals rather than just current data points.
