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At the same time, consumer and business confidence has deteriorated due to deepening spending cuts and job reductions. While unemployment remains low at 4.1%, a cooling labor market could add another layer of uncertainty. If hiring slows significantly while inflation remains persistent, the Fed may find itself unable to cut rates as aggressively as markets anticipate.
Tariffs and Rate Cut Expectations
Trade policy risks further complicate the Fed’s decisions. Powell has acknowledged that a single round of tariffs may have a limited inflationary impact, but if the proposed tariffs expand or escalate in multiple stages, inflation pressures could intensify. Unlike the tariff hikes of 2018–2019, which had limited impact on broad price levels, the current environment—already sensitive to supply-side shocks—could react more strongly.
Despite these risks, futures markets continue to price in three rate cuts this year—in June, September, and December. However, with inflation expectations rising, the Fed may push back against these assumptions, maintaining a more cautious stance. Powell’s post-meeting commentary will be critical in determining whether traders should recalibrate their rate expectations.
Market Outlook
With stagflation risks increasing, traders should brace for a more hawkish tone from Powell, even if rate cuts remain on the table. If inflation expectations remain elevated, the Fed may hold rates steady for longer than markets expect, creating potential downside for equities and risk assets. Bond yields could also rise as investors reassess the likelihood of aggressive monetary easing. The next key catalyst will be Powell’s press conference, which will set the stage for the Fed’s next move.
More Information in our Economic Calendar.
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