US Reflation Fears Warranted Due to Tariffs, Says Economist

Inflation and Tariffs

• 💡 US trade policy, specifically President Trump's tariffs, is identified as a risk for resurgent US inflation by the Bank for International Settlements.
• ⚠️ While initial data showed limited impact, this is attributed to firms running down inventories and adopting a wait-and-see approach due to policy uncertainty.
• 📈 Over the summer months, an effect from tariffs on US inflation is expected as firms exhaust inventories and gain more clarity on trade policy.

Economic Outlook and Fed Policy

• 📊 The June employment report is expected to show a gain of 125,000 payrolls, sufficient to keep the unemployment rate stable at 4.2%.
• 📉 This jobs report is not anticipated to prompt the Fed to cut rates, especially given recent comments from Chair Powell indicating a need to see both June and July inflation data.
• 🗓️ A July rate cut is considered unlikely, with September being the most probable meeting for a cut, but the central case is that the Fed will keep rates on hold throughout the year due to tariff-induced inflation.

Bond Market and Political Pressure

• 📈 Traders are increasing bets on the US 10-year yield falling towards 4%, a view that aligns with the economist's more positive outlook on treasuries.
• 🏦 This bond market sensitivity is partly due to the US administration being perceived as bond vigilant, which has capped long-dated yields.
• 🚫 Political pressure on the Fed is not expected to influence its reaction function; any earlier rate cuts would be driven by economic data rather than political considerations.