Economic activities in the United States are showing a moderate slowdown, while inflation data is steadily improving towards the 2% target set by the Federal Reserve. However, the implementation of tariff policies and the sharp rise in energy prices are likely to trigger a slight rebound in inflation. Analysts believe this will delay the pace of the Federal Reserve’s interest rate cuts, with expectations that rate cuts may be postponed until the last meeting of the year in December.
Market Expectations for the June Meeting
It is widely expected in the market that the Federal Reserve will keep the policy interest rate unchanged at the monetary policy meeting on June 18th. Fed officials have emphasized that they will patiently assess the impact of the president’s tariff policy on growth and inflation. Analysts believe this means there is little possibility of interest rate adjustments before September. The focus of market attention will be on the updated forecast data from the Federal Reserve, especially whether it still expects a 50 basis point interest rate cut space this year and next year respectively.
Inflationary Pressure and Forecast Revisions
ING Analysis
According to ING’s analysis, the Federal Reserve may implement only one interest rate cut in 2025. Although the current forecast remains in line with market pricing, the Federal Reserve may choose to maintain the existing forecast unchanged, but there is a risk of adjusting it to 25 basis points this year and 75 basis points next year. This is mainly due to the uncertainty of the pace of inflation slowdown after the implementation of tariffs.
Impact of Tariffs and Energy Prices
The implementation of tariff policies will directly push up commodity prices, while fluctuations in energy prices further intensify inflationary pressure. In this situation, the Federal Reserve needs to strike a balance between supporting economic growth and controlling inflation, making the policy path more complicated. Although the recent moderate inflation data is comforting, analysts believe that traders should be prepared for the monthly inflation rate to rise to 0.4% or even 0.5% starting from July. If the increase in energy prices after Israel’s attack on Iran persists, the price increase caused by tariffs may be further magnified.
Growth Risks and the Logic of Rate Cuts
Tariff Concerns
Although the tariffs on “Liberation Day” eased somewhat after significant concerns emerged in the market in April, analysts believe that the market is generally worried that these policies have caused some damage and there is still a risk of occasional escalation of tensions in the future. The sharp decline in consumer confidence indicates that the growth of consumer spending is facing downside risks. Families are worried that the price increase caused by tariffs will further compress their consumption capacity in the context of a deteriorating job market outlook. Meanwhile, the uncertainty of the trade environment may lead enterprises to postpone recruitment and investment decisions.
Beige Book Outlook
The latest Beige Book, which has a significant impact on the Federal Reserve’s monetary policy, holds a pessimistic attitude towards the growth outlook. The report warns that most Federal Reserve districts have reported “a slight to moderate decline in activity,” while “comments about delayed hiring due to uncertainty are very common.”
Considering that the Federal Reserve’s funds rate remains at 4.5%, while analysts predict that the long-term equilibrium level of the policy rate is 3%, this indicates that the reasons for cutting interest rates are constantly accumulating.
Key Considerations for Policy Timing
September Too Early
Based on the current analysis, September is too early for the Federal Reserve to cut interest rates with confidence. At that time, only the data of July and August will be available for reference. It is expected that there will not be sufficient evidence of labor market pressure to offset concerns that the recent inflation reading may continue to rise.
Housing Costs as a Buffer
It is worth noting that housing costs may help offset the impact of tariffs. Housing-related inflation has shown signs of easing, and rents for new tenants have turned negative. Given that housing accounts for approximately 40% of the core CPI basket, this process will help inflation return to the 2% target by 2026.
December Rate Cut Strategy and Market Outlook
ING’s December Forecast
Based on the above analysis, ING believes that December is a more likely time for the Federal Reserve to start cutting interest rates, and a 50-basis-point rate cut may be implemented at that time. Tariffs and energy costs are expected to push up the monthly inflation reading from July to October, but a more moderate performance will follow thereafter. The squeeze on consumption capacity caused by rising commodity and energy prices may lead to cuts in discretionary spending, which will affect the service sector and cool inflation in this area more quickly.
Labor Market Cooling
Meanwhile, the job market is cooling down and wage inflation is slowing rather than rising. This is precisely the key factor that has prevented the post-pandemic supply shock from evolving into a rapid inflation of nearly 10%. The market has no objection to the pricing of a 50-basis-point rate cut this year. However, compared with the market expectation of a 25-basis-point rate cut each in September and December, analysts prefer a one-time 50-basis-point rate cut in December, followed by three 25-basis-point rate cuts in 2026. This strategy is similar to the Fed’s approach in 2024, which is to wait until it is fully convinced before committing to entering a lower interest rate environment.
Conclusion
The Federal Reserve is confronted with complex policy trade-offs. Against the backdrop of slowing economic growth and a cooling labor market, the possible inflation rebound triggered by tariff policies and rising energy prices requires policymakers to remain cautious. The Federal Reserve is likely to adopt a gradual and cautious policy adjustment strategy. The timing of the rate cut in December is more in line with the Fed’s consistent practice of “waiting until it is fully convinced.”
Related Topics:
